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September 29, 2014 at 08:00 PM
The shale energy revolution has already upset the “peak oil” forecast, which predicted that the world will soon reach the point of highest physical oil output and thereafter global production will begin an inexorable decline. Now, in the context of the worsening political situation in the Middle East and Eastern Europe, its impact is being discussed in terms of America’s ability to secure its own energy supplies and assist its allies with theirs. The near-term enthusiasm for shale energy is understandable, but what are its longer term prospects?
Energy markets are notoriously difficult to predict. In the 1970s, as U.S. oil production reached a historic high point and turmoil in the Middle East produced two spikes in crude prices, there was talk of imminent scarcity. While global output stood at around 60 million barrels per day (mbd), some analysts declared that the world would be just about out of oil by this time.
However, far from going straight up, oil prices actually fell throughout the 1980s and 1990s, and, without any major new sources of supply emerging, reached $10 per barrel. Since the start of the new century, however, prices have been driven by the rise of China and rapid economic growth in emerging economies. The number of cars plying roads around the world increased from 750 million in 2000 to 1.2 billion currently. This has been the main reason why oil production kept rising, and now stands at around 90 mbd, whereas oil prices jumped roughly tenfold.
By 2050 there may be up to 3 billion cars in the world, possibly requiring oil production to increase to 120–150 mbd.
Apparently we face an age of scarcity in which energy prices will go ever higher. Or do we? The shale revolution changed the dynamics of the energy market. U.S. oil production is now the highest it has been in 27 years, and there is enough domestic oil to meet 84% of US demand. By 2016, domestic output should set a new all-time high and some forecasts expect shale oil production to reach 5 mbd by 2017.
Other countries, including Mexico, China and Brazil, are exploring their shale deposits as well. There has been something of an oil glut developing around the world and oil prices, despite political concerns focused on such oil producers as Libya, Iraq, Iran and Russia, have been generally soft.
Adding to the softness of the oil market has been a complementary natural gas boom, also from shale. Over the past decade, gross natural gas withdrawals in the U.S. rose by a third, prices declined and demand for gas for home heating spiked, while heating oil demand plummeted. Shale gas accounts for about half of U.S. domestic natural gas production, up from a very small percentage a decade ago.
During the past decade, oil prices have been uncharacteristically volatile, suffering an 80% drop, peak to trough, during the 2008 financial crisis, then staging a three-year rally which saw crude prices quadruple. This indicates, above all, considerable uncertainty as to where prices will go. However, over the past two years volatility has moderated substantially, suggesting a kind of truce between supply and demand.
Which Way?
In other words, demand has been growing as predicted and supply has been increasing apace to achieve price equilibrium. Any change in expectations could lead to a precipitous drop to $60 per barrel (a bearish forecast) or a jump to $150 per barrel (a bullish view).
Oil bulls tend to be pessimistic about the prospects of shale energy. Their case is twofold. One is financial: Shale energy is costly to produce, so the current boom could only happen amid high oil prices and thus contains the seeds of its own destruction. There have been moments when natural gas prices fell so low that some wells stopped production. The same could happen to shale oil producers if the oil surfeit they engender brings down prices.
