There's been plenty of talk about potentially radical US foreign policy changes as a result of the shale boom. While one shouldn't expect any dramatic US foreign policy move away from the Middle East, factors are influencing a greater focus on Asia. Only one thing is certain in this transforming world: The shale boom is real and the implications are many and difficult to predict.
In an exclusive interview with Oilprice.com energy security expert Michael Levi, the David M. Rubenstein senior fellow for energy and the environment and director of the program on energy security and climate change at the Council on Foreign Relations (CFR), discusses why oil price stability is still all about the Middle East, why the oil and gas industry is heading towards transformation and other topics.
Oilprice: What is the number one threat to energy security today?
Michael Levi: I am not a huge fan of using the word 'energy security' because it means different things to different people, and that makes it very easy for people to talk past each other. What I would say the number one risk to the stability of global oil prices – which can have big economic and security ramifications – is the potential for major conflict in the Middle East and instability in oil-producing countries.
OP: Are there any other regions that have this same destabilizing potential?
ML: The Middle East is always the place where focus is rightly drawn, because it is the place where you can have outsized disruptions. One of the things that I tend to emphasize is the need to focus and prioritize concerns, and it is very easy to get [drawn into] every 100,000 or 200,000-barrel-a- day change somewhere in the world that might have big consequences for one particular country, but does not necessarily have outsized global consequences or national consequences that policymakers need to think about. If I spend my time trying to think through what policymakers should be paying attention to, my focus, when it comes to disruptions to the oil system, tends to come back to the Middle East.
OP: The UK-based think tank Chatham House has published a new report seeking to demonstrate how the oil and gas industry is under significant pressure that will lead to a transformation. How do you see a potential transformation of the industry taking shape?
ML: I think it is important to start with a distinction, particularly one that is important in the US: the oil and gas sectors, to some extent, are becoming two genuinely separate sectors, rather than one integrated one.
In the past, most natural gas was produced as associated gas together with oil, and that made oil and gas as a single entity very clear, something that made a lot of sense. Now you have a lot of non-associated gas; gas being produced separately, often by companies that do not engage in much oil production. They really have distinct challenges and opportunities, and as a result, different sets of pressures.
For the natural gas industry, at least in the US, the big challenges are low prices in the glut of gas on the market that is not being matched by demand. A big part of this is certainly idiosyncratic; there are people who are drilling to hold leases and cash flow, and they are doing that en masse, which is a problem for the whole industry.
At the same time, they have not been able to coalesce around the efforts to boost demand.
The oil world is a completely different story and you have pressures from different directions right now. On the one hand, you have a surge in opportunities for development in countries where geopolitical risks are relatively low. In the US, Canada, and Brazil you may need to still worry about regulatory changes, but you are not worried that terrorists will come and capture your workers.
At the same time, for a lot of the companies, that is not enough and they are still looking globally, and they still face challenges from nationalism and unstable regimes. On top of that, they are entering a period in which there is probably more uncertainty in prices than there has been for a long time. You have this collision of growth and supply from outside OPEC, together with potential Iraqi growth and substantial investment from within OPEC that really opens up the possibility of a big, if temporary, price drop in the next five or so years. That complicates the outlook for companies, on top of everything else.
OP: Really? You believe that prices could drop in the future?
ML: I think prices could drop substantially. If you look at the most recent IEA report or the most recent OPEC outlook, you see that if all currently planned investment goes ahead, then at prices resembling current ones, supply would greatly outstrip demand.
Either countries will pull back with production and investment in OPEC and allow supply to match demand at relatively high prices – and I think that is the most likely outcome – or they will not be able to decide who has to pull back, and there will be an excess of supply on the market that pushes prices down quickly. That is self-correcting, because low prices cannot sustain the big gains in North American production. But you can still have temporarily low prices that really shake things up for some producers, depending on the properties of their investment.