If we needed just one example of the labyrinthine nature of global oil markets, it would be the fact that even as President Biden was visiting Saudi Arabia to cajole the kingdom to increase oil production, the Saudis were buying oil from Russia. Those purchases, at the embargo discount, allow the Saudis to export their embargo-free oil at the current high price. Despite headlines and hype about an imminent end to the oil age, oil and its price still matter. The way to tamp down prices, and to contain the risks—and the price consequence—of a loss of supply from Russia is to produce more oil elsewhere. While the U.S. remains the world’s biggest producer, it’s only third in terms of exports (Russia places second). Hence the energy realpolitik of meeting with the Saudis, the world’s biggest petroleum exporter.

In the modern era of oil geopolitics, every president has visited Saudi Arabia since Richard Nixon in 1974. The reasons have always been the same. Energy security is closely tied to stability in the Middle East. But while oil currently trades above $100 a barrel, and gasoline goes for about $4.50 a gallon, we have not yet experienced anything close to the two true energy shocks of modern times. Policymakers fear another loss of supply similar to what happened during the 1979 Iranian revolution and the 1973 Arab oil embargo, which triggered oil prices to jump 200 percent and 400 percent, respectively, and sparked global recessions. A loss of a major share of Russia’s supply to the world, whether from an accident or deliberate retaliation, would trigger a third energy shock. Under a worst-case scenario, J. P. Morgan analysts recently noted, oil would hit $380 a barrel.

Two things are different today. First, a shock this time could be more severe because comparable scales of both petroleum and natural gas supplies are at risk. While oil keeps everything moving, natural gas keeps the lights on and is a critical chemical feedstock in both manufacturing and agriculture. The potential price spike for natural gas is far greater than it is for oil. That’s what’s motivating the political scrambling, both public and behind the scenes. European leaders are canvassing the world’s producers of both fuels, from Algeria to Venezuela, and are busy planning for or implementing draconian energy-rationing measures.

The other new factor is the U.S. shale revolution, the fastest and greatest addition to world energy supply in modern times. The only comparable expansion started in about 1965, with the opening of Saudi Arabia’s giant Ghawar oil field. But the shale boom, 60 years later, added twice as much energy to world supplies over the same length of time. In more politically salient terms, the shale expansion added 800 percent more energy to the U.S. than did the subsidized expansion of solar and wind combined. In fact, the growth in U.S. shale energy production was nearly double that of the entire world’s expansion of solar and wind combined.

America’s energy transformation has had far-reaching implications, not least that the U.S. began exporting crude oil again for the first time in four decades, and at a volume double the last peak seen circa 1960. The U.S. now exports more crude than five of OPEC’s members. Policymakers spent a half-century handwringing about U.S. import dependencies and implementing programs that had little effect on overall energy realities. Instead, the technologies and techniques of the shale revolution, developed and financed almost entirely by private concerns, upended the status quo.

All of which raises a critical geopolitical question: Is it possible to ignite a repeat of the shale boom?

The long-promised “energy transition” that would putatively eliminate society’s dependence on hydrocarbons has not happened. So it would be dangerous to base policies on the assumption that such a transition is in the offing and could delink from Russian oil and gas or reduce the economic havoc from high prices. Those goals require both increasing supply from elsewhere while also reducing demand, whether from rationing or expanding alternative energy sources. With their newfound energy realpolitik, most European nations are now pursuing that “all of the above” strategy. The U.S. has not joined that club.

It is true, and not just a convenient excuse, that oil and gas production can’t be expanded overnight. But it’s also true that today’s oil prices are driven by expectations about the future. And it bears stating that regardless of any near-term resolution of the Ukrainian situation, the geopolitical and energy realignments will continue far into the future.

The Biden administration has apparently decided that the best way to signal that more oil is coming is to say, in effect, “I know a guy.” That would be the king, or prince, of Saudi Arabia, the world’s top oil exporter. Another policy path, and a better one, would be to say, “I know a system.” That would be the annoyingly chaotic but profoundly productive free-market system of the U.S. oil industry. I’m not the first to observe that America’s energy system could play a role in both reducing consumer energy costs and reducing geopolitical tensions (though, for the record, I was in a distinct minority making such a forecast a decade ago in a Manhattan Institute report). Inconveniently for politicians, the U.S. energy system is decentralized, being composed of thousands of CEOs of companies, small and large.

What if the U.S. government were to adopt policies that encouraged increasing domestic production? The mere prospect of the U.S. as a major exporter of petroleum and natural gas was the reason the world saw a roughly 50 percent drop in average global prices circa 2014—well before those exports became a reality. And the net effect of those lower prices was, until recently, to save consumers trillions of dollars (cumulatively) and, inversely, reduce revenues for producers, including especially Russia and OPEC.

Thus, relevant to today’s high prices and geopolitical tensions, a critical question is whether a shale resurgence could happen. A key feature of the shale industry is the speed at which wells can be drilled. Rather than planning and development that can take years for traditional billion-dollar hydrocarbon projects, each shale well represents an individual decision (with such decisions distributed among hundreds of companies) involving, typically, one one-thousandth the capital, with planning horizons measured in months and drill times in weeks. The effects of the combination of that velocity and the nature of the system have already been well demonstrated.

U.S. shale production rebounded rapidly after the oil price collapses that came with the 2008 recession and the 2014 decision of the Saudis and Russians to flood markets in order to bankrupt huge swaths of the U.S. shale industry. It even rebounded a third time after the economic collapse from Covid lockdowns, which brought the biggest decline in global energy demand in nearly a century. Each period saw the learning curves characteristic of all new industries. For example, as a fundamental indicator, the overall efficacy of shale rigs—energy production per rig—improved at an average rate of over 20 percent per year over the decade up to 2020. That meant that rig productivity doubled roughly every three years, the kind of tech gains that evoke eager headlines in other energy domains.

Similarly, the shale industry has radically improved overall labor productivity. Though policymakers eagerly tout the job-creation potential of alternative energy, the singularly important feature of progress over the centuries has been in reducing the number of labor-hours needed to deliver each unit of energy. That feature is more important than ever in an inflationary era with a shrinking pool of skilled labor. As it happens, the early days of the shale revolution saw a decline in average labor efficiency (barrels of oil produced per employee). But the combination of technology and the learning curve has brought U.S. oil production per employee to a level now 40 percent higher than in the pre-shale era.

The consequences of the latest financial blows to the shale industry are still playing out, however. Covid lockdowns wrought havoc on energy supply chains, disrupting operations, exploration, and expansion plans, and on a skilled workforce. All of that takes time to repair even without policy headwinds, and those headwinds are increasing with opposition to investment in hydrocarbons combined with the prospects for even more severe regulatory constraints. Even so, the question now is the same as it was a decade ago: Are there foreseeable technology factors that offer the possibility of a production resurgence?

The answers will be found precisely where revolutions in software and automation are now playing out. Practical digital tools are finally emerging for the “hard” worlds of machines, manufacturing, and supply chains. (I explored this emerging reality in another recent Manhattan Institute paper and in a book.)

Enhancing the productive capability of any employee is the specific objective of using artificial intelligence (AI) tools and automation, the latter especially in the form of useful robots. Popularized media tropes about machines and software taking work away from humans have it backwards. Augmenting and amplifying the labor pool is the path to accelerating production and reducing the costs of anything. Evidence of that trend and of new classes of more capable, untethered robots is visible with the expansion of robots used in handling packages and materials alongside warehouse workers to accommodate ballooning e-commerce demand. The International Federation of Robotics (IFR) reports a doubling over the last five years in the number of all classes of industrial robots used around the world, which now total a workforce of over 3 million.

It will be hard to predict the specific impacts of the digital transformation underway for heavy industries. As leading experts on AI have pointed out, “researchers and policy makers are underequipped to forecast the labor trends resulting from specific cognitive technologies, such as AI.” But one post-pandemic survey of more than 1,000 professionals in the oil and gas industries found that of “all the cost-efficiency levers, digitalization is the one with the most remaining potential,” with nearly 70 percent saying they had plans to increase such investment, the “highest level ever” in that long-running survey. “Pervasive digitalization is the only way I can envision our future activities,” Tom Blasingame, president of the Society of Petroleum Engineers, recently said.

Still, unleashing the potential for an American shale resurgence remains significantly in the hands of policymakers. Government leaders ignore at their political peril the importance of energy costs. Gallup’s long-running tracking poll about what people volunteer as the “most important problem” finds that the economy and inflation top the list by huge margins. The second-ranked issue was “government/poor leadership.” The Russia situation was halfway down the top ten, and climate change didn’t even make the top ten.

Given the importance of low-cost energy and the brutal lessons now visible in the geopolitical dependencies in Europe, it is past time for an energy realpolitik. That would mean a policy that embraces an “all of the above” energy strategy by unleashing competition among energy forms—rather than opposing, or favoring, one or the other. The competition we should want distills to that between America’s technology-centric possibilities and Saudi Arabia’s geopolitical calculations. Think of it as our silicon versus their sand.

Photo by Royal Court of Saudi Arabia/Anadolu Agency via Getty Images


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