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 cur-
rently. 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 scar-
city 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 Rus-
sia, 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.
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
Assessing the longer-term prospects of an energy revolution
BY ALEXEI BAYER
How Far Will the
Shale Boom Go?