As US oil output rises, the Middle East falls apart

The retreat of the US from the Middle East has led to two civil wars in Syria, and Iraq and, more broadly, the beginnings of some kind of decisive war between the two great sects of Islam: Sunni and Shia.

At the same time, America’s own production of liquid petroleum has now surpassed the previous peak reached in 1970 and, as the Financial Times reported over the weekend, four decades of decline in US output has been reversed in the past five years. The US is approaching energy self-sufficiency.

Coincidence? Hardly. President Obama pulled the US out of Iraq five years ago just as fracking was ramping up and oil wells were sprouting all over the US.

Since then, he watched as the Sunnis and Shiites fought themselves to a stalemate in Syria. Now he and the West are wringing their hands over what to do about the Sunni jihadists’ spectacular and brutal advances in northern Iraq.

In essence, the retreat of the US from the Middle East has resulted in the backers of the Sunni and Shia militants making a grab for territory and oil resources.

As a result, there is not only the potential for the great schism of Islam to now come to a head, but also for the breakdown of the Middle East borders that were drawn by Britain and France in 1916 using straight rulers following the fall of the Ottoman Empire.

Saddam Hussein attempted to redraw those boundaries in August 1990 when he bombed Kuwait City and then quickly overran the Kuwaiti army.

US oil production was in steep decline in 1991 when America invaded Iraq to protect Kuwait and its oil fields and defend those 1916 borders.

But America’s humiliation following the second invasion of Iraq in 2003, leading to its full withdrawal in 2009, left the hopelessly sectarian Shia government of Nouri al-Maliki in place, in turn leading to the Sunni uprising in the north and the fall of Mosul and Tikrit, along with its oil infrastructure.

In 2005, US Congress passed the Energy Policy Act, which exempted hydraulic fracturing (or fracking) from the Safe Drinking Water Act after the EPA reversed its previous position that fracking doesn’t fall under the SDWA.

That unleashed a wave of horizontal drilling and fracking across southern US that has lifted its production of oil and condensates to 11.27 million barrels a day in April, equal to the previous peak in 1970, and would have now passed that peak in the two months since. Oil production rose 18 per cent in the past 12 months, the fastest growth rate on record.

The US is now producing more oil than Iraq and Kuwait combined, and is expected by some to eventually pass Saudi Arabia’s production. This time it is sitting out the latest Middle East crisis.

The world’s investors, who had been slumbering into the northern summer with the Vix volatility index at its lowest level since early 2007, have suddenly woken up to a new oil crisis and a new outbreak of volatility.

Brent crude has spiked to $US114 a barrel and analysts are predicting that it could go much higher as the crisis in Iraq unfolds, especially if Baghdad falls and the oilfields in southern Iraq, and even Kuwait, come under threat from the Sunnis and their backers in Saudi Arabia and Qatar.

The International Energy Agency has declared that 60 per cent of the growth in world output for the rest of this decade will come from Iraq, which would meet the demand from China and India.

This must now be in doubt.

Meanwhile, the chief executive of Exxon Mobil, Rex Tillerson, has predicted that by the end of this decade, the United States will be self-sufficient in energy.

It’s clear that the rest of the world -- and specifically China -- can no longer rely on the US to act as the Middle East’s policeman to protect energy security.