The Shale Oil Revolution

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After years of dire warnings about the rapid depletion of proven oil reserves and a decade of turmoil and resource wars in the Middle East, a quiet revolution is occurring which may radically change the dynamics of the global market for crude oil. New technologies such as horizontal drilling and hydraulic fracturing are making oil extraction possible in regions where it was long considered too expensive to occur and opening up huge new reserves in countries which have long relied heavily on imported oil from abroad.

That there are massive oil deposits embedded in shale and chalk formations at sites around the world has long been known, but only with relatively recent developments in extraction technology have they become economically viable sources of crude for the world market. Additionally, these reserves are not spread in traditional patterns and are dispersed widely around the world. Russia, which is a non-OPEC oil exporters has a large supply of reserves, but so do traditionally import reliant countries such as China and the United States. The latter has already identified at least eight massive potential reserves and has begun drilling in earnest and ramping up its domestic oil production. It is estimated that by the end of 2012 the U.S. will be producing 720,000 barrels of crude per day from such sources, accounting for roughly 12% of domestic oil needs. As Conoco Phillips CEO Ryan Lance told an audience of OPEC ministers recently in Vienna:

“In 1990, North American reserves and production were falling but thanks to unconventionals (shale, chalk, and tar sands extraction), proven reserves have risen 68 percent since then..…there is the increasing potential North America could become self-sufficient in oil as well as gas by 2025”

Indeed, the rapid increases in oil production in the United States and elsewhere have already succeeded in driving down oil prices and are believed to be a potential force for softening the effects of the continued global economic slowdown. Whether the United States attains the goal of becoming fully energy self-sufficient by 2025 is beside the point; it is a near certainty that it is going to increase its oil production by a significant amount in the coming years and thereby greatly reduce its present level of dependence on foreign oil. A recent Harvard study suggested that the Bakken/Three Forks shale oil deposit shared between North Dakota and Montana contains enough potential barrels of crude to be economically equivalent to “a large Persian Gulf oil producing country”; right within the United States. This is no minor development, and the Bakken/Three Forks site is but one of many discovered reserves. Exploration continues at sites in the U.S. and around the world, and it is expected that countless more such massive deposits of shale oil are still to be found.

These developments are important not just economically but from political and environmental standpoints as well. On the one hand, the present degree of leverage possessed by OPEC nations over the global economy will inevitably be reduced. In response to these projections Kuwaiti Oil Minister Hani Hussein asserted that “oil from the Middle East will always find a home” – surely true, but less significant when Middle Eastern oil is no longer the only major player in the game. The ability of the present crop of major oil producers to manipulate prices will be greatly reduced as will their commensurate political clout. There is the potential today for major OPEC producers to increase capacity to drive down prices and thus slow the economic motivation for further investments in shale in the short term, but indications have been that there is little political will to do this in any meaningful capacity. In addition, the idea that OPEC heavyweights would exert pressure to reduce prices past the $60/barrel threshold (where shale often ceases to be profitable) over a sustained period of time seems belongs in the realm of fantasy given present political realities.

There is another more insidious aspect to the development of these newly economically viable sources of crude oil; the undercutting of the hoped for “green revolution” in energy production. The economic imperative for developing cheap and renewable sources of energy largely evaporates once you are suddenly awash in a wealth of oil, but the environmental hazards remain and in many cases worsen. Shale belongs to the same family of “tight oil” products as the notoriously environmentally destructive Alberta tar sands, which are famously believed to contain within them more carbon dioxide than has until now been emitted in all of human history. Extraction on a large scale can be expected to exacerbate existing problems with CO2emissions and climate change with potentially disastrous effects. With a new abundance of shale-based crude oil, the fiscal urgency to develop “green” sources of power will be gone and investment capital will flow back into more business-as-usual forms of energy production. While this may be good in the short-term for the economic and political fortunes of countries with major shale reserves, it may be devastating for the planet itself in the long-term. The shale oil boom promises to fundamentally realign the global oil market and shift political power away from its present equilibrium; but while this promises to create new winners and losers geopolitically it may end up being looked back upon as lose-lose for the world at large if it ultimately aborts the movement towards clean and renewable power and makes crude oil the prime energy source of the foreseeable future.

As production of shale oil and other crude “alternatives” ramps up around the world and as greater deposits continue to be discovered in the territory of current net-importers, the global oil market stands at a something of a precipice. While OPEC has heretofore been dismissive towards the potential of shale oil to undercut its market power, statistics which show meteoric projected increases in both reserves and output in countries such as the U.S. suggest that current oil producers may be acting with dangerous complacence. As technology continues to develop and improve the economic viability of extracting shale and other “tight oil” products, OPEC countries need to make tough decisions about exercising their production muscle to reduce prices and thus postpone the immediate imperative to develop shale oil sources; or conversely risk rolling the dice and allowing their market dominance to be challenged. This will end up being a potentially momentous decision not just politically and economically but for the potential long-term health of the planet as well.

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One Response to The Shale Oil Revolution

  1. I have seen estimates that in coming years, the Eagle Ford Shale in South Texas could be producing as much as one million barrels of oil per day. We need to become independent and free ourselves from the reliance on foreign oil.

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