International Business: Case Study of Shale Oil

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International Business: Case Study of Shale Oil

Executive Summary

            For 47years, the U.S. has been dependent on importing of unrefined petroleum from oil producing nations like Saudi Arabia. This was based on the reduction in the amount of oil produced in the U.S. The turnaround in the U.S. oil production was enhanced by shale production, an investment that was drawn from 2009. The shale has influenced the political economy, environment and the national competitive advantage of national and international oil producing companies, especially those belonging to OPEC. Politically, it has left Saudi Arabia, Iran, and Iraq fighting for their share markets through varied arguments. It has improved the U.S.’s competitive advantage of diverse industries using energy by lowering their production costs.  The environment feels the impact of shale negatively and positively as it emits dangerous chemicals and gases hazardous to life in the environment. For as long as shale improves, the other oil companies will have to play by the legal oil prices of the U.S.

International Business: Case Study of Shale Oil

Introduction

Since 1971, the United States has been dependent on foreign producers to the vast majority of the oil used in fueling the country. By2008, the production of oil in the U.S. was less than 5 million b/d while the net import of crude was high at 11.1 million b/d.  Thanks to the introduction of fracking or hydraulic fracturing for shale creation, that was made possible by technological improvements (horizontal drilling) in production, the U.S. past decade has been remarkably reversed doubling its oil production levels to approximately 10m b/d. It is this sudden shift from 47 years of importing a large amount of crude to the production of double what was imported, that compelled the development of this essay.  The paper is determined to explore the impact of the U.S shale oil production on the political economy, national competitive advantage and the global environment. These three dimensions will be looked at in relation to the other less developed countries in OPEC nations involved in oil production especially Saudi Arabia, who were the chief suppliers of unrefined petroleum to the new giant, United States.

Background

Shale oil is high-quality unrefined petroleum that lies between the layers of impermeable mudstone, shale rock, or siltstone. Oil organizations create shale oil by breaking the layers of rock that contain the layers of oil. That is rock suffused with kerogen, an antecedent to oil. Now and again, shale oil depicts oil that has been changed over from kerogen in shale rocks. At the onset of production of shale oil, firms drill down as far as two miles to get to the shale oil and rocks. After which they pump high-pressure blasts of water, sand, and chemicals to break the shale and discharge the oil. The sand is essential to hold the cracks open enabling the oil to seep into the well. In the Bakken fields, drillers utilize multistage hydraulic fracturing to make longer breaks. They perforate short fragments of the product packaging allowing them to concentrate the blasts of water in besieged spots (Needham, 1971).

The second mechanical progression is horizontal drilling. After drilling the well, they bend it at a 90-degree angle after which it is run on a level plane through the thin formation. The horizontal well can keep running for close to two miles. Even though a few organizations utilized horizontal drilling right on time as 2004, it was not economically friendly until 2009. That is when Brigham Oil and Gas effectively split a solitary horizontal leg into 25. The organization fractured every leg autonomously, giving a higher profit on the investment (Parker, 1970).

The Political Economy

The political economy is one of the government interventions so as to interrupt decisions made by groups, individuals, or companies with respect to social and economic matters. The term political economy encompasses legal, political, and economic systems that influence national and international trade. It is critical to understand that these government systems vary from one country to another. Speaking of the political arguments for intervention, they are geared towards protection of the interests of a given group, always producers, to the detriment of another, largely consumers. Examples of political interventions are the protection of industries essential for national security, jobs, protection of consumers from hazardous products, retaliation to unfair foreign competition, furthering of objectives for foreign policies, as well as defense of the human rights of persons in exporting nations. While political interventions are more into the protection of interests, the economic interventions are largely concerned with the overall wealth creation in a country benefiting both the producer and the consumer (Hill & McKaig, 2015).

For decades, Saudi Arabia has been at the core of the global oil market enforcing production targets as well as the prices of the unrefined petroleum for Organization of Petroleum Exporting Countries (OPEC) and other oil producers. It has been the world's largest oil exporter housing 18% of global oil reserves. Saudi Arabia has had its entire domestic, economic, and foreign policies deeply linked to petroleum and hence the Shane oil production, if adopted by other countries as well such as Canada may shake Saudi’s economy through reduced prices for its oil. Generally, oil produces 85% of Saudi's export earnings and 31% of the GDP (Asche, Oglend & Osmundsen, 2012). The power of being the core producer led to the development of domestic and international policies by Saudi. For instance, total dependence on petroleum built a social contract between the Saudi royalty and the Saudi Arabian citizens, with the government controlling the economy, offering employment to two-thirds of the employees, proving jobs and subsidies in trade for an authoritarian political system. This impressive trend may as well be reversed when Shane oil production gains popularity. The contract is tangible for as long as Saudi Arabia maintains being the vast oil producer and oil prices remain high. With the U.S. remaining at the top, oil prices are likely to decrease and Saudi Arabia losing its position, simultaneously the social contract will be revoked (Hill & McKaig, 2015).

Internationally, Saudi Arabia’s foreign policy largely involved two main goals: a coalition with the U.S., and a rivalry with Iran. The US-Saudi alliance is fundamentally based on unrefined petroleum since the U.S. was until lately the world’s prime importer. The alliance seems to be threatened for U.S. shale production has made it the largest producer. Chances are high that in the future of this alliance will not exist, for Saudi will not reach its former dominance with the arrival of U.S. shale oil and a lately sanction-free Iran joining the oil industry. However, some analysts critique the idea on the basis that Saudi Arabia’s oil supremacy will not retreat in the near future, and Saudi will carry on to play a significant role in the oil markets. Economically, the U.S. shale oil is going to kill the Saudi GDP. In 2016, the Saudi budget had a deficit of 13.5% of GDP as they wholly depended on oil. Additionally, the Saudi currency has high reduced because of low prices of oil, increasing government debts to make up for the budget. Saudi will be left with no option but to follow, its vision 2030 of diversifying its economic resources (Cimoli, Dosi & Stiglitz, 2009).

OPEC was established in 1960, providing its member nations with doubtfully unparalleled control over oil markets. Since its commencement, OPEC’s stake of global oil production has steadily instituted a chief portion of overall world production. Chronologically, OPEC represented over 40% of the world's raw petroleum generation and was in charge of exporting about 60% of the aggregate oil exchanged globally. Thus, the cartel's gigantic extra limit that could be easily moved to suit the condition in the worldwide oil markets, combined with its fundamentally minimal cost of production, enabled it to assume the part of a Swing Producer, applying solid impact on unrefined petroleum costs (Davies et al., 2014).

However, the situation changed to the detriment of OPEC countries when oil costs slammed in mid-2014 because of the oversupply made by the U.S. shale makers. Initially, OPEC chose to continue drawing large amounts of oil regardless of the diving costs to safeguard its share in the worldwide oil markets. Until mid-2016, this methodology appeared to function admirably for the member nations as they could without much of a stretch sustain their oil yield even at a cost of $30/barrel. All things considered, the prolonged shortcoming in oil costs began weighing intensely on the OPEC countries and their economies, which are profoundly reliant on oil exports. In this way, the cartel members who had previously chosen to adopt a forceful strategy to push back on U.S. shale oil production were compelled to pull back their yield to support oil costs and thusly empower their dwindling economies. This was announced by OPEC at the bi-annual meeting in Vienna cutting production from 1.8 million barrels/day until the first quarter of 2018 (Vidic et al., 2013).

While the market had expected the move, the intervention did not strongly affect raw petroleum costs, not at all like the surge in commodity costs envisaged in November 2016 when the OPEC bargain was first declared. To place things in context, the West Texas Intermediate (WTI) unrefined petroleum costs had gone up by over 9% in November following the underlying consent to lessen yield, rather than only a 2% bounce in oil costs when OPEC reported the extension of the cuts. This pattern does not just demonstrate that the proposed output limitations are insufficient to meaningfully affect oil prices, yet additionally alludes to the way that OPEC's power to impact raw petroleum prices is melting away (Kilian, 2016).

National Competitive Advantage

The 2014-2016 global drop in raw petroleum costs has been investigated widely by oil market examiners. Results have given empirical information for numerous reasons such as an increase in demand and geopolitical conditions. The shale oil transformation is generally thought to be the principal driver of price improvements. Since 2012, raw petroleum creation limits in the U.S. have almost multiplied due to the fast development of its shale oil industry. The growth of shale production influences the national competitive advantage as well as that of the oil-producing countries in the developing states (Asche, Oglend, & Osmundsen, 2012).

Internationally, the shale production of the U.S. has threatened the competitive advantage capability of OPEC countries such as Saudi Arabia, Iraq, and Iran. The nations are likely not to make any profits when the prices hit $20 since Shane production systems are highly expensive for less developed OPEC countries. To get to the crude oil, OPEC nations will have to entrench deeper into the soil before getting to oil tables. If sales are poor, they are likely to suffer losses. Therefore, the countries are likely to lose their competitive advantage with the coming of hydraulic fracking shale production systems. In as much as shale has brought down the benefits of other oil producing companies in the developing world, Saudi Arabia still maintains a competitive advantage over shale productions (Krugman, 1987).

The lowered oil prices will leave less developed OPEC nations struggling to meet their profits for only a few like Saudi could make money at such prices. The ability of Saudi Arabia to manage profits at low prices of oil is based on the production cost. Saudi uses an average cost production of less than $9 for production of barrel oil. It has the cheapest production cost worldwide with Iran, Iraq, and OPEC falling at an estimate of $10 per barrel, an amount that is slightly below for competing nations. To determine the average cost of production, four data items are considered: production cost, capital spending, administrative and transportation prices and gross taxes. Saudi Arabia spends only $3.5 on capital to get a barrel out of the ground. The amount is inclusive of funds invested in drilling new wells and needed equipment. The factor behind all the cheap production prices is because its oil is located near the surface of the desert and gathered in large fields, leading to little investment to draw it from the ground (Ring, Lenway & Govekar, 1990).

Saudi Arabia has been an undisputable leader in the world oil markets. However, the progress in shale fracking technology produced oil in the U.S. after many years of decline overtaking the position of Saudi Arabia as the largest producer worldwide. Truly, shale drillers pulled out so much oil that the world turned out to be inconceivably oversupplied, which made costs crash. The Saudis did not improve the situation, utilizing their low expenses into higher volumes to drive the greatest number of shale makers out of the market as it could. In any case, the move lost effect for it coerced shale makers to end up considerably more productive, which prompted a critical reduction in costs. All things considered, production costs for U.S. shale are still more than double those of Saudi Arabia because of higher costs across the board. Saudi Arabia still maintains a competitive advantage based on two strategies (Plentiful pools of oil near the earth surface and zero taxes on production). Hence, it can make money in the environment of any price (Kilian, 2016).

Nationally, the U.S. shale production will impact on the competitive advantage of other oil producing companies and other industries. The competitiveness of many industries in the U.S. is dependent on energy costs, precisely the variation between oil and gas prices. The reduced prices of oil and gas have altered the competitive landscape for many businesses in the U.S. such as the plastic resin industry. In the past decades, producers suffered high costs of production due to high energy costs and today the U.S. is one of the lowest cost producers worldwide. The reduced oil and gas prices have led to flooding of new investments in varied industries announced in 2010, an increase in exports and reduced imports. Small-scale producers are graduating to have large facilities. The growth of factories will boost U.S. employment and improved expenses in local communities. Indeed, the competitive advantage shale production has brought to the US industries with contributing to economic gains and manufacturing renaissance creating demands (Vidic et al., 2013).

The Environment

Environmental studies on the impacts of shale production dates back to 2009/2010. Notwithstanding this, countless studies have been done, concentrating on coordinate (neighborhood) hydraulic fracturing. There is additionally the life cycle evaluation (LCA) researches, yet the vast majority of them just concentrate on greenhouse gas (GHG) emanations and related environmental change influence. Two LCA studies have evaluated a full scope of effects typically considered in LCA. They give life cycle effects of power produced from shale oil in contrast with other power innovations. Some of the environmental effects are earthquakes, air emissions, and water contamination (Davies et al., 2014). 

Air emissions:

Different air pollutants are produced during the extraction of shale oil and gas, such as nitrogen oxides (NOx), alkenes, alkanes, volatile organic compounds (VOCs), and silica particles. These emissions originate from the equipment used onsite, specifically condensate tanks, compressors, and gas pipelines. The emission of hydrogen sulfide (H₂S) at the time of extraction is an essential worry for the sustainability of the global environment. H₂S is a prime danger since it is toxic to people and it is corrosive. The corrosive nature implies that it could erode equipment and pipelines, discharging further H₂S and different chemicals into the environment. Episodes have been recorded in which the delayed release of H₂S has happened following fracking activity, yet what causes this is obscure. Nonetheless, it is theorized that chemicals utilized as a part of fracking fluids might be reacting with H₂S and microorganisms in the rock arrangement, prompting the emission of H₂S which poses danger to the global environment (Hill & McKaig, 2015).

Different other air toxins are discharged in whatever is left of the life cycle of shale gas, causing air-related impacts, for example, ozone layer depletion, acidification, and photochemical smog. Acidification is a water-and land-related effect caused by air discharges of NH3, NOx, H₂S, and, Sox. As recorded earlier, just two LCA studies have so far looked into the environmental influence of shale production apart from the global warming potential (GWP). These two investigations assumed the utilization of shale gas for electricity production in the UK, contrasting its other renewable energy source, nuclear, and fossil-fuel. The results demonstrated that the qualities for the impact extend broadly, depending on presumptions. For instance, while assuming a higher substance of H₂S, the acidification potential (AP) is 4.1– 7.5 times higher than for ordinary gas, though for sweeter gas, the relative variation in AP decreases to 66 %. However, in the best case, shale gas has an AP that is practically identical to that of traditional gas and lower than that of solar photovoltaic (PV). In the most pessimistic scenario, it could be four times higher than for an ordinary UK coal control plant (Cimoli, Dosi & Stiglitz, 2009).

Water Contamination

Shale production leads to stress in the water sources since it involves high water requirements. During shale production, the amount of water required for hydraulic fracturing is huge, 3000-21000 m3. The quantity entails 86% of the direct water needed for shale extraction and 56% overall consumption in shale production life cycle. Moreover, an increase in volumes produced equals increase in the amount of water used. The process of hydraulic fracking involves a mixture of water, chemicals, and sand. The process highly contaminates water endangering aquatic life, freshwater, and marine eco-toxicity. The last two are largely caused by disposing of drilled waste on land (a common practice in shale production). The toxicity is due to high quantities of barite in the drilling fluid poisonous to aquatic organisms. In the focal and best cases, the effect of shale gas is comparable to that of traditional gas. This makes it up to an order of magnitude superior to nuclear, solar PV, and offshore winds. In any case, it is outstanding that shale gas has freshwater eco-toxicity twofold that of LNG (focal case) due to a large measure of drilling waste. If no measures are put in place, in the next few years, freshwater will be no more (Hill & McKaig, 2015).

Terrestrial Eco-toxicity

This is a further issue related to shale gas extraction connected to land impacts, generally due to the disposal of the drilled waste containing toxic elements such as barite. Landfilling and land farming are the widely recognized courses, with the latter including spreading waste onto agricultural land. The two LCA investigations showed that terrestrial eco-toxicity capability of power from shale oil in the focal case was 13– 26 times higher than that of regular gas. This effect is additionally higher for shale gas than power from other renewable energies such as offshore winds, nuclear, coal, or solar PV by close to10 % and 4.5 times. This is fundamentally (90 %) because of land farming of penetrating waste and the consequent testimony of overwhelming metals and barium in the soil. In the most pessimistic scenario, shale gas is 14 to 73 times more regrettable than every single other alternative (Rodrik, 1995).

Earthquakes

The induction of quakes from shale production has raised a considerable measure of concern. Tremors are largely caused by cracks caused during fracking, reaching out to previous stress lines in the rock, leading to a slip. However, as shown in Table 1, they are not unique to shale production in the oil and gas industry. They are also smaller in magnitude than those identified with other operations like coal digging and repository impoundment for hydroelectric undertakings. The extents of the tremors caused by fracking are not largely felt but rather cause little harm. Essentially, the quantity of recorded tremors is significantly smaller than that of different exercises. Examples of quakes caused by shale production are Lancashire (UK), British Oklahoma (US), and Columbia (Canada) (Asche, Oglend & Osmundsen, 2014).

Table 1: Magnitude of Quakes induced by human activities by shale production fracturing and other industrial activities

Source: Davies et al., (2015)

However, increase in shale production could make worse the danger of further quakes. Simultaneous study showed that connections between expanded recurrences of wastewater injection increase the magnitude of earthquakes. This could lead to adverse effects on the natural habitat and individuals through destruction of property and natural surroundings, and also pain and outrage by the affected population. Despite this hazard, anthropogenic tremors can be relieved using seismic monitoring.

In conclusion, the U.S. shale oil production is a significant game changer in U.S. and the entire world as it has enabled reduction oil prices. Shale has influenced political economy of the less developed OPEC nations in the oil industry shaking the US-Saudi alliance and other treaties made by these nations. Extensively, it impacts on oil production of OPEC countries in terms of their ability to influence supply. The shale production also leads to dire consequences in the global environment. Its use of chemicals and emission of gases in the air due to the fracking procedure contaminates water and land threatening aquatic and earth life. Additionally, the production leads to pending of renewable energies that were in the process of being developed. Regarding the national competitive advantage, the U.S. Shane oil production has led to reduced production prices for its industries and is likely to envisage profit and investment growth, increasing its exports and reducing its imports. Internationally, the competitive advantage of the oil producing companies in the developing countries belonging to OPEC is threatened and the majority are left looking for alternatives to meet their economic demands. However, only Saudi Arabia is left enjoying a constant competitive advantage since its production costs are way lower than the shale oil in the U.S. For as long as the Shale production will continue to advance in production, the likes of OPEC members.