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US independence from OPEC crude is a tough goal

As the US celebrates Independence Day, it is a good occasion to remember the government’s efforts to free the country from its addiction to foreign oil.

More than 40 years after the Organization of the Petroleum Exporting Countries’ (OPEC) oil embargo, the US is still setting its sights on becoming independent from the group’s energy supplies.

President Donald Trump’s administration stated this goal clearly in its “America First Energy Plan,” which is posted on the White House’s website.

“President Trump is committed to achieving energy independence from the OPEC cartel and any nations hostile to our interests. At the same time, we will work with our Gulf allies to develop a positive energy relationship as part of our anti-terrorism strategy,” according to the website. 

One of the pillars of this plan is to resort to the shale oil resources that the US is endowed with. “Sound energy policy begins with the recognition that we have vast untapped domestic energy reserves right here in America. The Trump administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans. We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own.”

The plan sounds very ambitious but is it easy to implement? Will the US be able at any time to become fully independent of OPEC?

Some analysts like Dr. Francesco Stipo, president of Houston Energy Club — a gathering of oil experts and executives — believe that the US can indeed free itself from OPEC if it implements the White House’s plan.

In an article dated March 2 and posted on the Newsmax website, Stipo stated the following: “As an oil exporter, the United States can now play a major role in setting global oil prices, and OPEC decisions on oil production will have a lesser influence in energy markets.”

He added: “Although some OPEC members are strategic partners of the United States in the Middle East, American energy corporations shall have the right to pursue their economic interests in the context of free market competition.”

Stipo, like many others, proudly hails the advancement in US technology and how “new techniques of oil and gas extraction have released large volumes of fossil energy” and turned the US into an exporter of energy and made it regain its position as the world’s largest oil and gas producer.

No one can deny the tremendous breakthrough in US technology that will unlock billions of shale oil recoverable resources, but freeing the US from OPEC is far more complicated than most analysts or politicians might think.

First of all, it may be true that the shale oil revolution in the US has influenced oil prices in the last five years, yet the US producers cannot stabilize the oil market.

The sustainability of production from shale oil firms is also in question. The US shale oil producers keep pumping even when many of them have negative net incomes or cash flows. 

The prominence of shale oil drillers depends heavily on borrowing cheap money and that might not be the case in future as interest rates are expected to keep rising. TD Securities issued a report on June 30 saying that 41 out of 49 firms in shale oil areas have a negative net income.

Another issue is that most of the shale oil is light and sweet, a type of crude that is not economically feasible for US Gulf Coast refineries. So, as the US produces more, its refining businesses may not benefit and it will still need to import more heavy, medium and crude oil from OPEC countries. OPEC will have plenty of medium and heavy crude in the future, as most future increments will come from heavy fields in Iraq, Iran, Kuwait and Saudi Arabia. Supply from the US is always getting lighter due to fracking.

One of the points mentioned by Stipo is that OPEC’s decision will become less influential on energy markets in the future. Clearly, OPEC is struggling to balance the market but without OPEC, oil prices can go down to levels that crash the industry and ends any investment cycle.

The US cannot free itself fully from OPEC over the coming five to 10 years, at least, and it cannot afford to see a weak OPEC as this will hurt oil prices and curtail the investments needed worldwide to keep supply in line with demand. But OPEC must shape up and it must be ready to compete with American enterprises in a free market. 

The initial public offering (IPO) of Saudi Aramco might also open the door for more cooperation and less politicization of oil policies. The success of Aramco’s IPO might encourage others in OPEC to do the same, and that is what the US wants to see.

• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi