Last year was a wild one for the oil industry. Between January and October, oil prices rose to almost $80 per barrel — a 25 percent increase since the start of the year — thanks to fears stemming from Washington's withdrawal from the Joint Comprehensive Plan of Action with Iran. In the months that followed, due to increased U.S. shale oil production, weak consumer demand, fears over the future global economic outlook (exacerbated by the prospect of a Sino-U.S. trade war), the Trump administration's decision to authorize waivers to various countries to continue importing Iranian oil, and the inability of the Organization of Petroleum Exporting Countries (OPEC) and Russia to cut production sufficiently, prices cratered. This collapse wiped out any earlier gains and, combined with the threat of U.S. anti-trust legislation, has called into question the future of OPEC. Qatar, a marginal oil producer but the holder of the world's largest reserves of natural gas, even chose to leave OPEC — marking the first time a country has ever left the cartel.
At a time like this, it is tempting to think that oil will finally become just another commodity rather than one of the most important factors in global geopolitics. The experience of the past century would suggest that some caution is in order before strategists denigrate oil's future significance. Oil will remain the world's single largest source of energy for the foreseeable future, and the balance between global supply and demand remains perilously narrow. A major disruption in just a single major oil producer could send prices skyrocketing again and quickly push the world into a recession. U.S. production growth in the short run appears limited, especially as higher interest rates may starve small U.S. firms of the cheap capital they require to finance their operations. Despite their success in boosting U.S. oil production, most shale oil firms are notoriously unprofitable. Investors are tiringof the companies' flawed assumptions and questionable business practices and are urging them to focus less on production and more on profitability, which could mean lower output until prices recover. If U.S. production growth fails to keep pacewith global demand growth, the relative power advantage over pricing would again shift back to OPEC, which, along with Russia, controls over 55 percent of global oil production and 80 percent of proven reserves. Finally, the collapse in Venezuelan output has removed an important source of non-Middle Eastern oil from world markets. Accordingly, it is incumbent upon U.S. national security professionals to understand how the oil industry functions and keep the stability of global oil production high on their list of priorities.
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