The Permian Basin in Texas. The US shale shock has been a disaster for OPEC

The world’s commentating class has been too quick to write off the US as an economic and strategic hegemon.

Over the last week the International Energy Agency and OPEC have both capitulated on the phenomenon of US shale, acknowledging that the US will achieve unparalleled dominance of global oil and gas supply by the mid-2020s.

What they do not acknowledge – the Déformation professionnelle of the oil culture – is that it will be followed by a Chinese and Indian switch to post-fossil transport in the 2030s. The imperatives of climate policy will force this shift to electrification, Trump or no Trump.

This sequence has grim implications for Russia and the hydrocarbon regimes that have failed to diversify, and for the oil majors with such a heavy weighting on the London Stock Exchange.

It means the cyclical recovery of crude prices may be stunted, and painfully slow, before giving way to "peak oil" and irreversible decline as electric vehicles and electric short-haul aircraft reach critical scale.

The IEA’s World Energy Outlook forecasts that the US shale will account for 80pc of new global supply by 2025, lifting ‘tight oil’ output from 5 million to 13m barrels a day (b/d). Total US production will hit 17m b/d.

The Marcellus gas basin in Appalachia – bigger than Qatar’s North Field – will turn the US into the world’s biggest exporter of liquefied natural gas (LNG) in the 2020s.

“The US will become the undisputed global oil and gas leader for decades to come. The growth in production is unprecedented, exceeding all historical records,” said Fatih Birol, the IEA’s chief.

The US ramp-up vaults past the Saudi Arabia’s big moment with the 5.7m b/d Ghawar field in the Seventies, and past the huge gas discoveries of Western Siberia during the Soviet heyday.

Combined crude and gas output will plateau “well above” 31m b/d of oil equivalent. “This is 50pc more than any other country has ever managed,” said the IEA.

“Tight oil has weathered the turbulent period of lower oil prices since 2014 with remarkable fortitude, its resilience confounding expectations in some quarters that a spell of low prices might nip the revolution in the bud,” it said.

The Saudi gamble that sub-$50 oil would wipe out US shale was a misjudgment. The massacre never happened.  OPEC has lost the war of attrition. Venezuela has in the meantime gone bankrupt.

Scott Sheffield, the founder of Pioneer and "King of the Permian", told me earlier this year that break-even costs in his prolific zone of West Texas have dropped to $25. Production from each well has jumped by half with digital technology and laterals drills of up to 10,000 feet. “As long crude prices are around $50 to $55, we're in the sweet spot. It took us 40 days to drill a well in 2014. We're already down to 20 days," he said.

Mr Sheffield said outsiders had persistently failed to grasp the economics and geology of Permian shale, and would be stunned when the prolific basin surged to 8-10m b/d in the 2020s. At the time, OPEC ridiculed such claims. Not any longer. The cartel’s annual outlook last week raised its US shale forecast for the next four years by 56pc.

The petrochemical and plastics industries that thrive on cheap US gas are visible all the way along the US Gulf coast from Galveston to New Orleans. The IEA says 13 million tonnes of ‘ethane crackers’ are coming on line. They make ethylene, a building block of the manufacturing supply chain.

One can forget that the US was facing an energy crisis in 2008. Crude imports were soaring. Net energy and petrochemical imports were adding over $500bn dollars a year to the US current account deficit, or 3.5pc of GDP.

This promises to be a 2pc surplus by 2005, transforming the outlook for the US dollar and the global strategic balance. America’s LNG exports have helped to break Russia’s lockhold over pipeline gas contracts in Europe. The days when Gazprom could charge $14bn (per BTU) are long gone. Try $5 today. 

The coming surge of supply is leading to a US energy alliance of sorts with China, and undercutting the Kremlin’s hopes of lucrative pipelines from Eastern Siberia. Vladimir Putin’s dream has crumbled.

Set against this is a dysfunctional US president who threatens to destroy American leadership and wreck the global multilateral order. My assumption is that he will be swept away briskly, a mere historical curiosity.

US energy primacy will outlast him. By the early 2020s it will be clear that China’s Xi Jinping has failed to grasp the nettle of reform. Growth will slow to 3pc or even 2pc, leaving the country with credit hangover, stuck in the middle income trap with a fast-aging population. Will the baton really be passing from Washington to Beijing?  

For OPEC, the US shale shock is a disaster. Frackers rush to lock in the future delivery contracts as soon as crude hits a band of $50 to $55, guaranteeing a surge of short-cycle supply. It is permanent headwind, capping prices. OPEC oil revenues have fallen from $1.2 trillion a year in the glory days to $400bn, a huge shift in the global wealth.

Saudi Arabia has run its cradle-to-grave-welfare complex and the world’s fourth biggest military budget on assumptions of $120 oil. It has since embraced austerity slashed its ‘fiscal break cost’ – supposedly to $80, but spending is secret.  It is not enough stop the slide in foreign exchange reserves.  Borrowing has risen to levels that may soon attract attention. The acute political stress can no longer be disguised. Any illusion that Saudi Arabia is joining the modern world has been shattered by the absolutist purges of Crown Prince Mohammad bin Salman.

The IEA thinks there is enough global demand to go around for everybody. Oil prices will rise to the low $80s in the early 2020, despite extra US shale. This will followed by one last "Indian summer" for the Gulf states as they retake global share. Peak oil will be deferred until 2040. “It’s too early to write the obituary of oil,” Mr Birol said.

OPEC goes further. It predicts that fossil fuels will continue to meet 75pc of world energy needs in 2040, much as now. This is to treat the Paris climate agreement as a scrap of paper. It puts the world on a frightening path, with tipping points that could lead to the desertification of Amazonia and an irreversible chain reaction. This will not be tolerated by the world’s young. Technology has already moved ahead in any case.

The IEA embraces electric vehicles, but cannot seem to consummate. It thinks the EV share will be no more than 280 million of the 2 billion passenger fleet by 2040, trimming oil use by just 2.5 m/d. It mysteriously supposes that trucks will stick to diesel, even though eTrucks are about to to hit the market and UPS is starting to electrify parcel deliveries.