Shale Gas Helps Fracture U.S.-Saudi Ties

By Joergen Oerstroem Moeller

Shale oil and gas has been labeled a game changer. Statistics would suggest that, yes, the new technologies and discoveries associated with hydraulic fracking change the energy picture and economic outlook, in particular for the United States, but less so than predictions would have it a year or two go.

The greater impact won't be on the US economy, but rather US-Saudi relations and stability for the Middle East. President Barack Obama met King Abdullah March 28, and both leaders recognize that the geopolitical ground shaped by their common interest in stable oil prices has shifted, creating a new imbalance that could spill over into Mideast security policy.

Estimates for the impact on US economic growth vary from 0.2 percentage points per year to a marginal hike of the growth rate. Petrochemical exports have risen threefold from 2006 to 2012, but account for not more than 1.2 percent of US gross domestic product. The trade balance has improved by a modest 0.1 to 0.2 percentage per year, yet still is in deficit to the tune of around 3.5 percent of GDP. The expectations were and still are that shale oil and gas would help bring manufacturing back to the US - re-manufacturing. The figures do not bear such hopes out though. From 2007 to 2009 more than 2 million manufacturing jobs were lost; 600,000 have returned.

Most analyses set the profitability of the technology to extract shale oil and gas at an oil price of US$60 to 80 per barrel. That should put future extraction on the safe side, but so far low hanging fruits have been plucked, postponing the prospect of higher costs. Hydraulic fracking is exempt, totally or partly, from major federal environmental laws such as the Clean Air Act and the Safe Drinking Water Act. These exemptions are not likely to vanish overnight, but environmental concerns are lurking in the background; any alterations will inevitably result in higher costs.

Since the Shah of Iran's fall in 1979, the world of oil has been governed by a tacit American-Saudi Arabian understanding that keeps a firm grip on Middle East politics. There have been ups and downs, but the partners have never questioned the understanding - until now.

One of the consequences was implicit US support for Saudi Arabia, keeping the Middle East under Sunni Muslim control despite religious trends and demographics in favor of the Shiites in several countries governed by the Sunnis. Obviously, the resentment has grown and over the last decade surfaced, raising the prospect of nothing less than a civil war between these two religious orientations. The Saudis probably, almost certainly, expected the US to intervene in Syria to prevent the Shiites from getting the upper hand. Preparatory talks in February/March for the President Obama/King Abdullah meeting signaled that the two sides were inching closer to reconcile their views, but it is not clear what came out of the summit. The recent US decision to suspend operations of the Syrian embassy indicates a policy shift although its direction may not be obvious. The Russian intervention in Ukraine/Crimea may have made the United States more aware of the need to accommodate Saudi Arabia instead of linking up with Russia.

Observing US dithering and faced with the turmoil in Bahrain, Saudi Arabia gradually has come to realize that the United States is changing course in the Middle East albeit without a clear new course or objective - except that Saudi Arabia does not count in the same way as it used to. And in Iran, while it's unclear what lies behind the negotiations on Iran's alleged nuclear weapons, the plain fact that the US is shifting track is one more straw on the camel's back.

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Joergen Oerstroem Moeller is a visiting senior research fellow, Institute of Southeast Asian Studies, Singapore, and adjunct professor, Singapore Management University and Copenhagen Business School.

Rights: Copyright © 2014 The Whitney and Betty MacMillan Center for International and Area Studies at Yale. Yale Global.

(AP Photo)


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