U.S. Shale – The ‘Navy’s Fifth Fleet’

Sam Winstel
Posted July 26, 2019

Historically, tensions in the Strait of Hormuz – like those currently between the U.S. and Iran – would portend serious price impacts for American consumers. But not anymore, thanks to the U.S. energy revolution. As it turns out, America’s strongest defense against crude oil supply disruptions is our homegrown energy offense.

Driven by growth in the Permian, Bakken and Eagle Ford shales, production of U.S. oil has significantly reduced our reliance on foreign suppliers. In 2018, U.S. net imports of petroleum accounted for about 11% of domestic consumption, the lowest levels in more than 60 years. America has surpassed Russia and Saudi Arabia as the world’s largest producer, and the U.S. is projected to continue driving supply growth to become a net exporter of crude oil and petroleum products by the end of this year.

Because of this energy abundance, we’re now shielded from crude oil price volatility in a way that we weren’t in previous eras. This week, Bloomberg dubbed the shale revolution the “U.S. Navy’s Fifth Fleet” – that is, a powerful force for guaranteeing supply stability, which carries weight in policy negotiations in the Middle East. According to Bloomberg:

“[T]he shale revolution bedevils OPEC. It tends to moderate the price of oil and limits the organization’s power to engineer the market. Shale particularly confounds one OPEC member: Iran. It can’t credibly threaten to induce a global recession by harassing tankers, because if the price of crude starts to jump, U.S. shale production will rapidly increase.”

U.S. production has made the global market one of surplus, not shortage – even as demand for oil and petroleum products continues to rise. Plus, improvements in worldwide energy efficiency are reducing inputs per unit of GDP, and declining energy intensity indicates decreasing dependence. This is all good news for American consumers because, by reinforcing our energy security with resource development and export growth, we’re cushioning the domestic economy against global disruptions that have impacted supplies in the past.

Notably, we’ve seen the volatility of global crude oil prices decrease considerably since 2018 to roughly one-seventh of historical levels. The data below suggests that the growth in U.S. oil production seems to have altered the relationship between Brent crude and West Texas Intermediate (WTI) crude prices. To be clear, American consumers have benefitted first and foremost, but the global economy has also seen gains – and that’s the upshot of the U.S. energy revolution.

At the same time, American foreign policy is strengthened. Because of domestic output, the U.S. is less vulnerable to others’ attempts to leverage energy.

Former Secretary of State Condoleezza Rice recently noted:

“[I]f we had been sitting here ten or 15 years ago with that kind of tension in the Strait of Hormuz, we would have been seeing oil prices spike through the roof, but we’re seeing a structural change in the nature of oil markets largely because of the North American platform. … It really is a bit of a lesson, by the way, to the bad boys of the oil markets, that they can't play these games in quite the same way.”

Domestic abundance supports U.S. energy exports, which also bolster our country’s diplomatic goals. Earlier this year, Secretary of State Mike Pompeo said exports assist our allies and promote the principles of free enterprise, rule of law and regional stability. For America, natural gas and oil production helps advance self-sufficiency and prosperity at home, while countering rivals abroad. Pompeo at CERAWeek in March:

“It’s really – it’s very simple: Our plentiful oil supplies allow us to help our friends secure diversity for their energy resources. … There could not be more of a contrast about how America uses its energy resources than how the leaders of []Iran use theirs.”

With Iran disrupting supplies in the Middle East, American energy is increasingly a force for good in the global marketplace. Because energy security impacts national security, U.S. natural gas and oil production is a risk-mitigating influence worldwide.

Among political superpowers, America rises above the rest as a champion of market-driven access to reliable and affordable energy resources. As the engine behind this access, U.S. natural gas and oil helps promote stability and democratic values across the globe.