Morris R. Beschloss 2016-03-04 05:17:22
The downfall of fracking Saudi Arabia, which has benefi tted from the military protection of the United States since its emergence as an independent kingdom in the early 1920s and recognition by President Franklin D. Roosevelt in 1934, proceeded to extinguish fracking-inspired U.S. energy independence by bringing world oil prices down to non-competitive levels most recently with massive overproduction. But this ingratitude toward American interests goes back to events in the 1970s after nationalizing the Arab/American Oil Company (ARAMCO), which was responsible for transforming the Saudis into a sophisticated global oil producer. After nationalizing all foreign interests shortly thereafter, Riyadh declared an embargo on shipments to the U.S., under the pretext of America’s pro-Israel support in the 1973 October war against Egypt and Syria. This resulted in international oil prices jumping from $2 to $10 per barrel by both the Saudis and Iran, which was happy to also use the “Yom Kippur” war pretext to raise prices. While Saudi Arabia continued to expand its world domination of crude oil pricing leadership by a reputation as “swing producer” at times of periodic shortages, the U.S. was ready to protect its “ally” by eliminating Iraqi dictator Saddam Hussein’s threat. This came after he conquered Saudi ally Kuwait. By virtue of Desert Storm in 1990, which stopped Hussein, and the U.S. Iraqi invasion of 2003, which eliminated him, the Saudis were free to continue their global oil production supremacy. But the latest chapter of intransigence against the U.S.’s miraculous fracking innovation should now be clear to all observers. When oil prices started slipping from $100 per barrel for West Texas Intermediate by June 2014, the Saudis seized this opportunity by accelerating their production to well over 10 million barrels per day. After the Vienna OPEC meeting on Nov. 24, 2014, the Saudis surprised everyone by calling for accelerated production to “kill off fracking,” even though it meant further drops in oil prices. Their excuse was protection of market position. Even though this has proven successful for the Saudis in ever-increasing U.S. cutbacks in all aspects of oil production and the lowest prices since 2004, there has been no voice of disapproval from America’s governmental leadership, which has verbalized frustration with ISIS, whose budding caliphate has been partially financed by the extremist Saudi Wahabis. They have operated under the premise that their governmental dismemberment would be carried out in neighboring states (Iraq, Syria, Jordan, Lebanon) but not in Saudi Arabia. There has been no exclamation of disapproval from the U.S. government or hints of self-protective reaction. How and if this manifestation of America’s revived oil production plays out will largely be the decision of the next U.S. president, who will have to decide if America’s interests must override those of any other nation, whether friend or foe. U. S. OIL EXPORTS MAY SURGE GLOBALLY As previously predicted in these columns, the lifting of the 1974 Nixon Oil Embargo as part of last December’s budgetary compromise already is activating an export surge even earlier than expected. Already in early January, shipments from Corpus Christi, Texas, bound for Germany’s Bavaria and Marseilles, France by Enterprise Products LP launched what likely is to become a major world market for WTI light sweet crude. This may signal an eventual U.S. market export development estimated to reach 2 million barrels a day within the latter part of next year. In anticipation of this eventuality, Enterprise Product Partners and Plains All American Pipeline already have spent billions of dollars in the past five years building new pipelines, oil storage tanks and dock space at ports. In fact, Enterprise already had received permission from the U.S. Energy Agency to ship less than 20% light condensate oil even before the embargo lifting. While the U.S. export potential will require a considerable additional expenditure in pipeline infrastructure and port expansion, this likely will proceed in tandem with work already underway to prepare many export outlets. These will formulate and ship liquid natural gas, already in the developmental stage in southern Texas and Louisiana. What is overhanging this unprecedented oil and natural gas expansion opportunity is the current unexpected drop in world oil prices, which has generated severe cutbacks, both in employees and monumental capital expansion. While the near-hysterical predictions of oil prices as low as $20 per barrel or even less have been predicted by such major financial institutions as Goldman Sachs, a moderate reversal from a $30 bottom makes the future U. S. oil and natural gas export bonanza even more promising for America’s future economic development. A RE-RECESSION IN THE MAKING? When a summation of falling 2015 global import/export prices earlier this year indicated serious slumping, the somber blare of oncoming recession was coming forth from the usual “expert” sources. Although this global price shrinkage is increasingly disturbing, it tends to mirror an accelerating surplus of supply over demand throughout most of the world. While the fear of glut has generally been limited to oil and natural gas, this global deflationary circumstance is an indication worldwide demand expansion may have gotten ahead of itself, if only temporarily. Most excessive in this regard has been China; although other emerging nations, especially major commodity producers, have added to this imbalance. When poring over last year’s import/export price downturn, it was no surprise that the millions of imported daily Brent crude oil barrel prices averaged a 41% downturn in 2015. But what was more surprising was a wide gamut of industrial supplies, agricultural products, automotive and aircraft parts, plus a wide spread of consumer goods, exceeded an estimated 12% import price downturn in all of 2015. This resulted in a shrinkage of America’s annual trade shortfall to near 40% of the average trade deficit generated in the decade prior to the outbreak of the great financial recession (2008-10). This caused a considerable trade downturn of goods and services immediately thereafter. As the year 2016 progresses, there are a number of major economic factors that will continue to engender the current global slowdown longer than previously expected: 1) The U.S. dollar continues to gain strength, even against its leading currency competitors, the pound, euro and yen. 2) U.S. exports, the leading revenue-generating sector of the American economy, are being severely slowed by the strength of the dollar and its restrictive price restraint. This is further impacted by past demand-level reduction. 3) The Environmental Protection Agency, with its severe regulations, has effectively destroyed coal production and hobbled Appalachia, the Mid- Atlantic sector where this profuse natural resource was primarily being excavated. 4) The U.S. government’s neglect of upgrading the nation’s badly-needed infrastructure of piping systems, roads, railroad tracks, bridges and dams in favor of a controversial national health-care system, climatological purity and investments in “renewables” producers that are proving commercially costineffective, also is a factor. The combination of these factors make it highly doubtful that 2016 will turn into a banner year economically for the U.S., as well as for most of the rest of the world. But look for America’s outsourcing of domestically produced oil and natural gas, now available worldwide, to eventually make the country the universal energy leader in the years to come. MORRIS BESCHLOSS is a global economic analyst, award-winning long-term top business executive, and avid blogger for all aspects of worldwide financial, geo-political, and economic happenings.
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