The End of OPEC?

Is the “center of gravity” of the global energy system about to shift from the Middle East to the Americas? That’s the provocative thesis of an article by Amy Jaffe in the new issue of Foreign Policy. “By the 2020s”, she writes, “the capital of energy will likely have shifted back to the Western Hemisphere”. (The headline writers drive home the point with a simple "Adios, OPEC".) Her case is fairly straightforward: on one side, technical developments are boosting oil and gas development in the Americas; on the other, revolutions in the Middle East and North Africa promise to induce “long and steep” declines in oil production. Indeed she sees a potential feedback loop at work: the “boom in the Americas” means that Middle Eastern rulers “may not be able to count on ever-rising prices to calm resive populations”.

I’m not convinced. (Full disclosure: I’m currently working with Amy on a couple of research projects.) As of 2008, the Middle East accounted for 25.7 mb/d of liquids production, while the Americas contributed 22.4 – a smaller number, to be sure, but not by much. (I’m going to focus on oil, but the gas pattern is even more lopsided: in 2008, the Americas produced more than twice as much natural gas as the Middle East.) This suggests that if the Middle East is currently the “capital of energy”, it holds that title for reasons other than sheer volume of oilput. This suggests that we should be skeptical of claims that more Western Hemisphere oil production, or less Middle Eastern oil supply than expected, will fundamentally alter the global order.

Indeed there are fundamental reasons for such skepticism. The Middle East plays a special role in the world of energy in three basic ways. As the home to most of the cheap oil in the world, it plays the role of price setter, with broad economic consequences. As the home to most of the easy to develop oil in the world, it can play the role of price stabilizer, though it appears to be doing that less these days than in the past. And as home to perpetual geopolitical chaos, it has the potential to erupt suddenly in conflict, sending oil prices through the roof.

An increase in Western Hemisphere production will do little to change any of those facts. Oil in the Americas (particularly on the new frontiers) is generally expensive and difficult to develop. Nor is an upsurge in production there going to reduce the risk of conflict in the Middle East. It is difficult to see how a moderate quantitative shift will fundamentally reorder energy geopolitics.

It’s also worth being a bit skeptical of the trends that Amy identifies. It’s true that oil output suffered after Qaddafi took over Libya in 1969 and after the Iranian Revolution in 1979. But those were revolutions that were followed by isolation from the rest of the world. Today’s revolutions, in contrast, are more likely to lead to increased integration. I’m also not convinced that the boom in the Americas could push oil prices down far enough to cause unrest in the Middle East. The new oil frontiers – shale, pre-salt, oil sands, and such – have one thing in common: they require high prices to be economical. Low prices and massive development in the Americas aren’t mutually compatible.

But back to the broader point. It’s worth noting that the belief that geopolitical muscle will follow energy production is not a new fallacy. The early part of the last decade saw the United States turn to Russia as a potential alternative center of gravity for the world of oil. Indeed today Russia is the world’s leading oil producer. No one thinks, though, that it matters more than Saudi Arabia as a result. Indeed Eurasia never really had the potential to take over the Middle Eastern role in world oil markets – for the same reasons that the Americas don’t today.