Have faith in the shale gale

Repeal of the export ban on crude oil grows in national urgency each day that goes by. The recent fall in oil prices again spawns bleak forecasts of bust for the shale boom, but consider a monumental change underway. For the first time in 50 years, world oil markets are beginning to hover around the U.S. rather than OPEC, the latter a 65-year-old cartel consisting of nationally owned oil companies, most of whose governments are unstable and inimical to U.S. interests.

{mosads}As Saudi Arabia predicted in 2011, the global axis of energy has shifted from the Middle East to North America. Low oil prices may unsettle the global oil market, but a powerful historic advantage now sits in our country’s lap. The United States has become the world’s largest energy producer in combined oil and natural gas, an astonishing feat achieved in 2013.

A year ago, oil prices began their plunge. As a result, half of the rigs have now left the shale fields and more than 100,000 jobs disappeared. Yet the prodigious growth and increasing influence of U.S. oil survives. Rig count is not a reliable indicator for production levels, particularly in hydraulically fractured wells. The most cost-efficient and higher yielding wells are still producing. On May 15, U.S. production reached a stunning 9.6 million barrels.

In response, Saudi Arabia has shifted from its traditional role as the world’s swing producer to a defensive one to reclaim lost market share.

U.S. oil now represents 75 percent of the growth in world oil production, a surge in supply that has eroded the Saudis’ unquestioned dominance. In a recent decision to maintain or even increase production in response to the current glut, OPEC apparently aims to undermine the profitability of the higher-cost shale industry by prolonging the glut that collapsed oil prices last year.

Betting on endurance as the lowest-cost producer, Saudi Arabia intends to reclaim market share. The Saudis’ new American rival, however, is not the only factor checking Saudi clout in export markets. The kingdom’s own population is increasing its energy consumption at a rate likely to shrink the spare capacity for which Saudi Arabia has so long been vaunted.

Saudi Arabia’s new stance cedes to the U.S. the role of swing producer. Can the competitive shale industry assume this role? With a massive volume of stored oil and 3,000 to 5,000 wells drilled but awaiting fracking, U.S. producers inadvertently created a swiftly deployable spare capacity — previously Saudi Arabia’s exclusive advantage.

The longstanding dynamic of the global oil market around which so much of world geopolitics revolves is changing. If the U.S. is, by default, the swing producer, the global oil market can function more like a genuinely competitive market. In contrast to the OPEC countries, the U.S. does not have a minister of oil who imperially controls production to manipulate price. The shale industry consists of 4,000 small and mid-sized energy companies in which risk-taking, innovative engineers, oil men and investors compete in a relatively free market. Could Adam Smith’s “invisible hand” now replace the autocratic bullies?

Neither federal energy policy nor the global majors drove the U.S. shale revolution. The shale gale is a victory for entrepreneurs and free markets. An unrestricted U.S. market may have led to the current glut, but the American ascendancy may be sustained and enlarged in a second stage of the shale gale: a smarter, lower-cost chapter of the boom. Mark P. Mill’s new study, “Shale 2.0,” persuasively argues this case. Driven by “big-data analytics,” already successfully used by some players, the next chapter of the shale boom may be capable of doubling output and reducing costs by half, according to Mills.

Market dynamics triumphed in the first stage of the shale revolution by creating a formidable supply. U.S. producers now need access to the demand side. This global market, however, remains walled off to American producers by the outdated ban on exporting crude oil. Imposed in 1973, when prices were high and oil was scarce, the export ban was enacted under conditions opposite to those that prevail today.

The U.S. shale industry remains poised to take advantage of the economic opportunities at hand. Our national leadership’s embrace of this energy opportunity would extend its benefits across the country. Lifting the export ban on our crude oil should be an overarching national priority.

White is distinguished senior fellow for energy and environment at the Texas Public Policy Foundation and former chairman of the Texas Commission on Environmental Quality.