Contours And Implications Of Biden’s Energy Gamble Flop

American President Joe Biden began his term in January 2021 with two good policies.

One was to lift sanctions on the Russian Nordstream gas pipelines to western Europe. This unexpected move eased long-standing tensions between the two superpowers. 

The second was to increase the production of oil and gas from domestic tight sands (called shale plays, colloquially) to the extent that America became a major exporter, with the specific aim of soon becoming Europe’s principal energy supplier.

This would also have significantly boosted the American economy, which was then still in the thrall of the Wuhan virus pandemic. 

While this writer was sceptical from the start of the second policy succeeding, there was never any doubt that boosting production from shales was technically doable. 

Unfortunately, Biden’s decision to provoke Russia into invading Ukraine in February 2022, exactly when inflation was soaring in America, and energy demands were in the doldrums, resulted in a paradigmatic rupture between East and West, which has put paid to Biden’s great gambles.

To boot, the Nordstream pipelines were blown up last year by unknown actors. 

American drilling activity is still relatively muted, maritime LNG exports are down, crude oil exports have plateaued, as have the contribution from shale oil and gas plays, and they have been unable to cover up Europe’s shortfalls.

As a result, Europe is still heavily dependent on Russian energy, and is now saddled with the additional burden of having to source their balance requirements from third parties at higher spot prices. 

This is what the data shows: 

First, the US rig count, which is a direct measure of drilling and production activity, has continued to decline since late 2022 (see maroon curve in chart below).

As of March 2023, only 752 rigs are running onshore America. That is well below the thousand-rig mark of 2017-2020, when shale oil production was almost doubled. 

An additional issue with a low rig count is that current oil production levels cannot be sustained beyond another year or so, since shale oil wells deplete rather rapidly.

We are already seeing the impact, with the contribution of shale oil plateauing at around 65 per cent for over a year, instead of increasing. 

As a result, America has increased production from its conventional oil fields. But that has limitations too, since most of these fields are already into their mature stages, and trying to raise output from them is unsustainable, with recovery levels being affected. 

Second, American gas production has increased only marginally over the past year, with the contribution from shale gas plays actually declining (see green curve in chart below). This is again a function of the rig count.

Third, as a result, instead of swiftly ramping up production as Biden’s great gamble envisaged, exports of LNG by sea have actually declined over the past year.

This has put Europe in a pretty pickle, for, while they loyally abjured Russian gas to the extent possible, the resultant shortages were not covered up by LNG from America. 

It is interesting to note that exports of American LNG to India have decreased significantly since late 2021, when the first rumblings of a possible conflict in Ukraine were initially heard.

Fourth, American oil exports have picked up slightly over the past year, by about 20 per cent, but as explained earlier, since this growth is not on the back of a shale oil boom, it will be transitory in nature. 

Also, the average monthly export levels of the past year aren’t too much more than what was achieved in 2019. 

To make matters worse, exports to India, one of the major buyers of American crude, have declined significantly in 2023.

While India used to purchase between 0.4 to 0.7 million barrels a day from America between 2019 and 2022, making it a bright spot when demand slumped globally during the pandemic years, we bought less than 0.1 million barrels of oil a day from America in the first two months of this year. 

In contrast, Indian purchases of Russian crude have skyrocketed in the past year, and are at around 2 million barrels a day presently.

Thus, we may rest assured that this topic, so centrally important to America’s fortunes, will be on the agenda of the Biden-Modi banquet slated for next month. 

The only happy note for America is that crude exports to China have increased since the war in Ukraine began (see blue curve in chart below). 

Thus, in conclusion, Biden needs to do a great deal if he is to pull America out of the hole he’s gotten his country into on the energy front.

He has to get the rig count back up to above one thousand before the end of 2023, for starters. How he does that is up to him, but a simple rule of the oil patch is that oilmen always respond brilliantly to incentives. 

Similarly, he will have to cut long-term deals with large buyers if he is to guarantee an export market for American oil and gas.

So, a little policy clarity might be in order — both on the domestic energy front, and internationally. 

But if Biden is unable to raise production significantly from shale oil and gas plays, like America did so marvellously between 2017 and 2019, it will become increasingly difficult to maintain even current levels, and he will have to pay a grave political cost for that failed gamble next year.

All data from EIA website