Shale’s victory could spell the end of the US-Saudi alliance

“Nothing is more powerful than an idea whose time has come.”

–Victor Hugo

Amidst the endless sturm und drang of the present unholy political risk trinity of Trump, Brexit, and Europe, perhaps an even more important systemic change has gone largely unnoticed. The victory of America’s shale revolution—and the failure of Saudi Arabia to strangle it at its birth—means that the global price of oil will never be the same, with a permanent ceiling being placed over energy prices. This has almost incalculable geopolitical and macroeconomic consequences for a world that has largely missed its monumental significance.

The Permian Basin in west Texas, accessed through the fracking engineering revolution, is estimated to have as much oil beneath it as Ghawar, the largest field in Saudi Arabia. Further, the oil is cheaper to extract than are the riches in most countries within OPEC. It is estimated the bounty could last for 100 years. Almost overnight, the United States has risen phoenix-like from energy mendicant to one of the global big three–along with Russia and Riyadh, a setter of the global price of energy.

Coupled with the tar sands of Canada and the liberalisation of Pemex, Mexico’s heretofore state-controlled oil company, North America now stands as close to energy self-sufficiency as it is possible to be in the modern, interdependent world. This US does not have to worry overmuch—and with such tragic results—about the Middle East for the first time in modern history. At last, a policy of off-shore balancing vis-a-vis the snake pit of the region is possible.

If fracking is unambiguously good news for the US, it is a long-term threat to Saudi Arabia, America’s ultimate frenemy. Since World War II, the US-Saudi alliance has been based on a simple trade: America provides Riyadh with strategic stability while Saudi Arabia manages the steady and reliable flow of energy across the globe. With the advent of the shale revolution, and the relative diminution in Saudi power it underlines, however, the basic contours of this deal are being called into question as they never have been before in modern times.

While the Trump administration seems to have gormlessly fixed on a return to the pre-Obama stasis in the region—supporting repressive Sunni states such as Egypt and Riyadh instead of Shia-champion Iran—over time it is highly doubtful as to whether this old wine will retain its potency.

First, it was the Saudis themselves who have mightily tried to destroy America’s shale bounty, by pumping oil in ever higher volumes to drive the global price downwards, effectively negating the incipient shale revolution. This unfriendly economic act has failed. Shale rigs can be turned on and off like a tap, coming back online far more easily and at negligible cost compared with the fixed rigs of the Saudi desert. Thus, all the gormless Saudis have managed to do is make shale the ceiling of the overall global energy price, with shale coming back online whenever the price rises.

Second, while the Saudi’s John D. Rockefeller strategy (as we have coined it) did drive some US shale firms out of business, Riyadh—with its state-controlled oil company—knows precious little about how private American energy companies work. Throughout all of modern Texas commercial history, small-time Texas wildcatters with vision have been driven out of business, only to be replaced by East Coast money. The ownership of the energy may change but the drilling goes on. While the Saudi Rockefeller strategy has made life miserable for some wildcatters, it has not managed to destroy the thrust of the shale revolution at all.

Of course, unfriendly Saudi economic acts have been matched for years by murky political practices, from the country’s internal medieval repression, to funding radical madrassas throughout the world, to 15 of the 19 perpetrators of 9/11 being Saudi. Given the country’s litany of hostile acts, the shale revolution finally allows America to cut the doleful ties that bind it to such a treacherous ‘friend.’ Such a break would be world altering, indeed.

Published in City AM Money, March 24, 2017