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Is the US the New Saudi Arabia?

US is producing more oil shipments of export cargo and import cargo in international trade.

Is the US the New Saudi Arabia?

In its January Oil Market Report, the International Energy Agency (IEA) predicts “explosive” growth in US oil production, in reaction to rising oil prices. In a recent congressional hearing, Fatih Birol, Executive Director of the IEA, described the United States as “the undisputed oil and gas leader in the world over the next several decades.” US production is forecast to exceed 10 million barrels per day in 2018, surpassing Saudi Arabia and behind only Russia.

This incredible surge in production begs the question—is the United States taking on Saudi Arabia’s role in the oil market? It’s an interesting question, and certainly one that the current administration raises with its emphasis on “energy dominance.”

But the answer is no—the US industry will never play a similar role to Saudi Arabia’s in the oil market, no matter how much US oil production grows. To understand why, it’s helpful to consider recent oil market events.

Opec Pulls Back Supply To Boost Prices, But To What End?

After oil prices reached more than $110 per barrel in 2014, the benchmark Brent crude oil price collapsed to as little as $30 per barrel in early 2016. In response, OPEC combined with Russia to decrease oil production, with the goals of increasing oil prices and decreasing oil inventories. The deal to reduce production by 1.8 million barrels per day (bbl/d) was struck in late November 2016 and has since been extended through the end of 2018. The Saudis have delivered the largest portion of the supply decrease, significantly exceeding their agreed-upon cut of 486,000 bbl/d. Since the production cuts, the oil price has risen by roughly $25 per barrel.

This result certainly looks like a success for OPEC. But given changes in the global oil market, OPEC’s overall gains are likely to be temporary.

The shale oil that dominates US production growth delivers oil faster with much lower up-front costs than traditional oil and gas. This allows US production to be very responsive to price swings like the one that OPEC has created in the last year. This responsive US production is rapidly counteracting the OPEC production cut. In fact, the IEA forecasts that increasing US oil production alone will nearly make up for the OPEC cut by the end of 2018.

The new geopolitics

The rapid increase in US oil production leaves OPEC in a difficult position. OPEC has shown its ability to compel production cuts from its members and raise the oil price, but at the cost of losing market share as US production has grown in response to higher prices.

This loss of market share may be even more harmful to OPEC in today’s world of energy abundance. Predicting the timing of peak oil demand is becoming a parlor game among oil economists. While nearly all agree that the world will see one to two decades of continuing oil demand growth, maintaining market share in this changing world is more important than in the past. OPEC may have won the battle to raise the oil price, but it appears to be losing the market share war.

The United States Is A Crucial Oil Producer, But Not A “Dominant” One

The United States has become an important oil producer and changed the landscape of the global oil market, particularly with its ability to more quickly rebalance the market in response to price changes. But important differences between the US and Saudi oil industries mean that the United States will not take over the Saudi role in global oil markets, even though it is poised to surpass Saudi Arabia in terms of production volume.

Saudi oil is all produced by a single entity—Saudi Aramco—which is owned and operated by the Saudi government. Saudi Aramco does not operate on a simple profit motive like a for-profit company. Concerns about politics and management of the global oil market influence production decisions in a way that would not occur at a company solely focused on profit. Saudi Aramco plans to sell shares equaling five percent of its value in an initial public offering (IPO) in the second half of this year, but the fundamental structure and decisionmaking at the company will remain controlled by the government.

In the United States, the oil industry is made up of dozens of companies that make individual investment and production decisions, based on their own costs, financial positions, and appetites for risk. The US oil industry will never act as one to manage the market or raise prices. In fact, such behavior is illegal under anti-trust law. But this is exactly how Saudi Aramco and the other OPEC members operate—it is the very purpose of OPEC.

A related point is that all of the individual US producers are price takers in the marketplace, meaning that they have no ability to influence global oil prices through their own actions. But Saudi Aramco is large enough for its production decisions to influence prices. In addition to reducing production to push prices upward, as is happening today, Saudi Arabia can rapidly increase production to deal with oil supply disruptions. Saudi Arabia is the only oil producing country with significant spare production capacity. The US Energy Information Administration estimates that the Saudis keep 1.5 to 2 million bbl/d of production capacity in reserve, a strategy that would not make economic sense for a for-profit company.

This difference between price taking and price making is why describing the United States as “energy dominant” is misleading. To me, “dominance” implies an ability to move markets, whereas the US industry, while strong and increasingly important to global energy security, is not structured to achieve that end.

Another important difference between Saudi oil production and that in the United States is the very low cost of producing Saudi oil. The actual costs are a close-kept secret, but we know that they are among the world’s lowest. In a world where oil demand is likely to plateau and fall over the coming decades, the Saudi oil industry is likely to remain profitable through the end of the oil era. The US oil industry has achieved declining production costs through relentless competition and the discipline of lower prices. But the shale oil resources that have fueled the US production boom are inherently more expensive to produce than those in Saudi Arabia.

How Will The Saudis Play In The New Oil World?

Although the United States has become an indispensable source of oil and gas production, Saudi Aramco will continue to play a unique role in global oil markets, owing to its immense size and influence and its low production costs.

An interesting question to watch over the coming years will be how Saudi Aramco reacts to the combination of abundant supply and an end to demand growth that, although it may be many years away, is inexorably approaching. To date, the Saudis have focused on managing prices and ensuring that their reserves last well into the future. But with a potential end to demand growth, will they change their strategy to compete more strongly in the market on price, acting more like the American producers? Only time will tell.

Samantha Gross is a fellow at Brookings’ Foreign Policy, Energy Security and Climate Initiative. This article originally appeared here.

The case of regulation of oil and gas shipments of export cargo and import cargo in international trade.

The Dangers of Deregulation

In the last few days, the Trump administration’s oil and gas deregulation push entered a frantic new phase. On the last business day of 2017, the Department of the Interior rescinded a 2015 rule regulating hydraulic fracturing (or fracking) on public lands, and reworked regulations on safety for offshore drilling. Another dramatic announcement occurred on January 4, when the administration proposed opening up nearly all US offshore waters to drilling.

President Trump has been clear about two goals of his administration: a push for what he calls “energy dominance” and a clear distaste for regulation of all kinds, particularly of the energy industry. But these two goals can be contradictory—the ongoing regulatory rollback may not ultimately benefit the energy industry. Deregulation could even do more harm than good, creating an uncertain long-term policy environment and undermining public trust.

Changing Policy Creates Business Risks

As I’ve written earlier, the energy industry invests primarily in capital-intensive, long-lived assets—oil fields or power plants with lives measured in decades. A stable policy environment is important to these investments. Regulations and policy that are created in one administration can be rolled back in another, and the instability creates a challenge for managing and valuing such assets. Energy companies crave regulatory certainty.

Energy companies crave regulatory certainty. Many companies, particularly large international corporations, are unlikely to substantially change their practices in response to the regulatory rollback, as they have global operating procedures to prevent safety and environmental incidents that could harm their assets or reputation. But when an incident occurs, the entire industry bears the reputation of its weakest actor. A regulatory floor to govern behavior is thus good for everyone.

Reputation And Trust Are The Most Important Assets Of All

In the United States and around the world, energy production depends on support from local communities, what the industry calls “social license to operate.” Especially in a democracy, public opposition can make life very difficult for energy producers. Public support for energy resource development depends on trust—in the companies doing the development and in the regulatory structure that governs their activities.

When the Trump administration dismantles energy regulation, it runs the risk of undermining the trust that underpins domestic energy development. U.S. oil and gas production has grown dramatically in recent years, but we have also seen a public backlash.

For example, hydraulic fracturing, and the oil and gas development that depends on it, faces deep grass-roots opposition in many parts of the country. Concerns about contamination of drinking water and other water resources are the most pressing concerns. Three states have banned the practice entirely, including New York and Maryland, which border the Marcellus Shale gas resource (the third is Vermont, which has no known oil or gas resources). The hydraulic fracturing regulations the Trump administration withdrew were focused on well construction, wastewater management, and chemical use disclosure—the issues of greatest concern to the public.

Likewise, the Deepwater Horizon disaster in 2010 was a crucial moment for the oil and gas industry in the United States. A cascade of failures resulted in the largest oil spill in U.S. history. A bipartisan presidential commission studied the incident, and the new regulations issued in response were an important step toward restoring trust in the U.S. offshore oil industry. But the Trump administration is altering these regulations, for example by eliminating independent inspections of safety and pollution equipment that the bipartisan commission recommended.

I don’t mean to imply that oil and gas production in the United States is suddenly unregulated. State, local, and tribal regulations still apply to hydraulic fracturing on public lands. Safety and environmental regulations on offshore drilling have not been eliminated, just softened. And the proposal to open nearly all U.S. offshore waters to drilling is an opening salvo in a battle likely to go on for some time. Many governors, even Republicans, are vehemently opposed to drilling in waters off their states.

But the hard push toward deregulation is likely to have consequences for public trust, not just in companies, but in government itself. If the public feels that the government is being run by and for the energy industry, accomplishing many important societal goals—like modernizing infrastructure and preventing the worst impacts of climate change—become much more difficult.

Even in areas where oil and gas are central to the economy, the public favors protective regulation. Oklahoma provides an example. Seismic activity, caused by underground disposal of oil and gas wastewater, increased exponentially during the drilling boom there. The state government has responded with much greater regulation of underground waste disposal, including shutting down disposal wells in problematic areas, greatly increasing monitoring requirements, and establishing a public process for approving some disposal wells. Despite the increased regulation, the industry is thriving in Oklahoma, which was the sixth largest oil-producing and third largest gas-producing state in the United States in 2016.

Oil and gas production involves a delicate balance between sufficient regulation to protect health, safety, and the environment and ensure public trust, without unnecessarily strangling development. Smart people across the political spectrum are likely to disagree on the particulars of a “Goldilocks” regulatory scheme. But I fear that this administration is moving too far and too fast in the direction of deregulation, potentially harming the industry it is trying so hard to protect and promote.

Samantha Gross is a fellow at Brookings’ Energy Security and Climate Initiative. This article originally appeared here.