Below is my op-ed in today's Investor's Business Daily "How the Shale Revolution Has Reduced Geopolitical and Price Risk":
Despite America's recent re-emergence as an energy superpower, thanks to revolutionary, Made-in-the-USA extraction technologies, we are still coming to grips with how U.S. shale production has completely rearranged the world's energy order. As the price of oil plummeted below $30 per barrel, explanations for the collapse have focused on Saudi market strategy and concern about China's jittery economy, not on the emergence of shale in America.
Even as the U.S. rig count has retreated (see chart above), shale remains the key to understanding the global oil landscape. The lack of geopolitical risk in the oil marketplace is an important clue.
Consider that despite all of the turmoil in key oil-producing regions, namely the Middle East, oil prices have not spiked. They have only continued to slide. Geopolitical risk, which tends to wreak havoc on oil prices at the most inopportune times, is nonexistent. Nothing - not Russian intervention in Syria, not ISIS attacks on Libyan oil infrastructure, not the torching of the Saudi Embassy in Tehran - has been able to stop the oil price collapse.
It's tempting to dismiss the lack of risk considerations as simply a reflection of the size of the oil glut or the concerns about China's economy. But that would be wrong. The prices for oil futures contracts get us closer to the real story. Contracts for Brent crude oil futures don't rise above $50 per barrel until mid-2020.Geopolitical risk hasn't just been removed from the oil marketplace for the next few months or year, but for the next five years.
What is going on here? Does turmoil in the Middle East suddenly no longer matter? The American shale oil model has changed the world oil marketplace for the foreseeable future. Shale producers' ability to quickly throttle down or ramp up upstream investment spending, drilling and production, as oil prices change, is viewed as an effective shock absorber against any potential oil price spikes.
Though U.S. oil production has remained stubbornly strong (see chart above) since oil prices began their slide more than a year ago, domestic production is expected to fall this year with $30 per barrel oil. The most recent forecast from the Energy Department calls for a nearly 8% decrease in oil output in 2016 over last year, with further production declines predicted for 2017.
Oil traders have seemingly come to a consensus that even as global investment in new production has been slashed and rigs idled, an uptick in prices would trigger a near-immediate response from U.S. shale fields. The relatively short time between investment decisions and the addition of new production to the market in the new shale model poses quite a contrast to other unconventional sources of production - take slow-developing, deep-water drilling projects in the Gulf of Mexico.
It might seem questionable to continue to promote the vital importance of the American shale revolution. Boasting about it now as the U.S. drilling rig count evaporates might even seem foolhardy. But the oil market has fundamentally changed since shale technologies emerged in America as a free-market triumph.
The full measure of the shale oil model's impact will be tested when the current crude glut clears and geopolitical risk returns, which is a near certainty. As oil prices eventually rise, will production from America's shale oil fields rise in tandem and absorb the shock?
The next president is likely to find out, and the answer will almost certainly be "yes." And maybe that president will do something President Obama has never done - acknowledge the game-changing shale revolution as the most extraordinary energy success story in U.S. history.