Is Fracking The Market's Revenge On OPEC?

Market interference by petro states spurred the energy revolution led by fracking, according to the head of commodities research for Citigroup—and that revolution is bound to spread around the world.
As it spreads, governments will find it more difficult to interfere in energy markets, said Edward L. Morse, the managing director and global head of commodities for Citi.
"The irony is that what we see unfolding is a return to market forces," Morse said during a recent panel discussion in Chicago, "an erosion of the ability of countries to use oil or natural gas as an instrument of foreign policy."
The OPEC nations still have the lowest production costs in the world, Morse said, but because of "the calamity in petro states" they have the highest revenue requirements. For example, the price of oil is often elevated to pay for populist measures, such as high salaries and allowances, to appease populations that could be swayed by extremists.
"For example, there is no doubt that at least some of the rapid increase in world energy prices between 2005 and 2008 was the result of insufficient investment in oil and gas production in the Middle East, Russia, and, to some extent, in China," Morse has written in Foreign Affairs. "In most cases, underinvestment was intentional, to slow production growth in order to influence global energy prices."
Over time, that kind of price manipulation fosters innovation elsewhere, Morse said, such as the combination of hydraulic fracturing and lateral drilling that has caused a gas and oil boom in the United States.
"Revolutions are brought about by high prices, and they are making conventional what used to be unconventional: shale and tight oil in the U.S., deep-water (drilling), which is very important to this scenario, and then oil sands in places like Canada," Morse said. "Because of the requirement of high prices by OPEC countries, this unconventional stuff is probably going to be in the market for a long time."
Morse appeared on a panel sponsored by the Chicago Council on Global Affairs with two other energy economists who supported his view, though in more restrained terms.
"We've started to see a response in production that takes the edge off of" high prices, said Michael Levi, a senior fellow for energy and environment at the Council on Foreign Relations. "It's primarily a technological response that allows increased production in places like the United States but also elsewhere to start to moderate prices. What that does going forward is allows us to rely a little less on expanded production from countries that are making political decisions about how much to produce."
Energy Scholar Jan H. Kalicki spoke of the leverage that policy has in shaping the energy market, but Morse emphasized the power of the market and the interference of policy.
"I think it's the market that's the lever and not policy, and policy ought to be supportive of the market," Morse said.
Asian and European countries are "lining up" to buy U.S. liquified natural gas exports, Morse said, because they are free of policy constraints on exports from other nations.
"Why are Japanese and Korean customers lining up to buy U.S. LNG? It's because it's an alternative to oil-linked LNG, it's because its on the other side of the strait of Hormuz, and it's because they can resell it not the spot market."
"I think it will have this fundamental structural change on the gas market which will deprive companies like Petrobras and countries like Qatar from maximizing their revenue through the mechanisms that we've seen."
Though fracking has been slow to catch on overseas, Morse predicted it will:
"What's unfolding in the U.S. is bound to not only continue to unfold in the U.S., but it's not going to remain confined to the U.S. It will expand. It may not expand very rapidly, or it may expand very rapidly—that's an important policy issue—but it will expand to the rest of the world, so this is kind of permanent."
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