Politics of Power

Across the country, 24 states have declared energy emergencies in response to lingering cold blasts that continue to slam the South and Midwest. A propane shortage has caused 14 million Americans to pay nearly double for recent deliveries of the pungent gas. It would appear that the U.S. is in the midst of an energy crisis that challenges the basic heating needs of millions of homes. However, this is merely a blip, a snap-shot, not of a shortage but of the opposite—a global energy boom that has to the potential to fundamentally alter the energy landscape.

The price of a barrel of oil and, by extension, the price of gasoline, relies on two fundamental human constructs: supply and demand and fear. Some analysts are quoted as saying there is roughly a $10-to-$15 risk premium per barrel of oil (approximately ten percent of what you pay at the pump) caused by fear. This fear has been mainly focused on the Middle East. Wars in Libya, Iraq and Syria, protests in the Gulf States, regime change in Egypt, Tunisia and Yemen, and a relentless nuclear program in Iran have created a false sense of normal. However, 2014 shows signs that this reality should be questioned; fears can dissipate, and in the process the price of oil can fall.

On Jan. 20, a temporary agreement to halt aspects of Tehran’s contentious nuclear program went into effect. The deal brokered between Iran and a U.S led coalition released billions of Iran’s sequestered oil revenues in return for a cessation in key nuclear production areas. Iranian oil production could realistically increase to roughly 3.6 million barrels per day (bpd). This would raise exports to 2 million bpd, positively affecting the world’s total production of roughly 75 million bpd. The Iranian energy sector had been robbed and neglected under President Mahmoud Ahmadinejad and with bilateral talks progressing, President Rouhani has the opportunity to revitalize the backbone of the Iranian economy. Iran could once again hold the world’s attention not with its nuclear program, but with its energy industry.

This is a trend that is playing out across the global energy landscape. Iraq, a country torn by invasions and years of sectarian conflict, is watching its production surge. Already the world’s third largest oil exporter, Iraq has the resources and contracts to potentially double production to 6.1 million bpd by 2020 and possibly even reach 8.3 million bpd in 2035. In addition, there is growing hope for a war torn Libya that saw production fall from roughly 1.6 million bpd to zero in 2011. Production then rebounded much quicker than analysts expected and reached 1.5 million bpd in 2013. With the potential for the political, economic and financial system to recover, Libya is well positioned to drive down global prices. Overall, the volatility that has rocked the Middle East for the last decade is situated to recede and bring hope to a whole region.

Most importantly, in the U.S., crude oil production is approaching the previously unthinkable. America has recently passed the historical high of 9.6 million bpd of production. Deep sea plays, hydraulic fracturing and previously uneconomical sources of hydrocarbons are now flowing in the U.S.. The U.S. has recently assumed the title as the world’s leading liquid fuels producer and by 2016 the International Energy Agency (IEA) predicts oil production will surpass Saudi Arabia as number one in the world.

Through a combination of slower economic growth, increased fuel efficiency and electric and hybrid cars, demand for oil in the developed world will continue to decline even as production grows. In combination with a decreased fear premium, the price of oil has a very real potential of settling lower than predicted, and that means lower prices at the pumps.