The December 6th article in the Economist on oil describes the economic impact of shale oil production versus OPEC. This is good news for the consumer and bad news for the geo-political influence of the oil sheikhs of Saudi Arabia.

Saudi Arabia and OPEC have decided to maintain production at the current level betting on putting some of the overextended new shale oil barons out of business and thereby maintaining the price at the current levels. The price per barrel has fallen precipitously to $70 per barrel.

The problem with Saudi Arabia’s bet is that the cost of drilling a new well in the United States is only on average about 1.5 million dollars, whereas the cost of drilling and the time to put a new field in difficult to access fields is prohibitive and the time to put it on line is lengthy.

America now rivals Saudi Arabia in total daily oil output. The average American consumer will see their out of pocket expense per year drop substantially. The drop in the cost of filling up at the pump will be equivalent to a 2% pay raise. The shale oil producer in America will counter Saudi Arabia’s move by slowing their growth down to where they will take their profits instead of spending them into new production thus stabilizing the price.

Shale oil production is bad news for the oil Sheikhs as we have just begun to tap the reserves we have. Colorado, and the field between Kansas and Oklahoma have yet to be tapped and the world has many shale deposits as well. There are as the article in the Economist points out shale oil fields from China to the Czech Republic. The days of OPEC and in particular Saudi Arabia running the show are numbered.

The American shale oil production will allow American foreign policy to change. No longer will we be at the beck and call of Saudi Arabia to engage in wars to protect the worlds economy and oil supply. We have a glut of oil at the moment and this glut is likely to continue for some time. The price per barrel may go up temporarily as the new American oil producers sort out who survives from being overextended financially from drilling too many wells in a short time.

Russia’s territorial expansion dreams should be short circuited as the drop in the price of crude may very well dampen their ambitions because it takes money to go to war.

Most importantly the impetus for the United States being in further wars in the Middle East will be reduced substantially. The economic pressure to be engaged in a part of the world that is beset with religious differences will be removed. The lives of our soldiers will no longer be sacrificed for the dictators, and theocracies of the Middle East. In time with the increased production of shale oil, the Sheikhs will no longer be able to hold oil over our heads as a form of extortion. It will take time for the long term effect of increased shale oil production to take hold but peace and greater prosperity may actually be the long term result.


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