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.
Besides, shale producers have used
debt to fund their exploration and production, which has been both easy and
cheap in a low interest rate environment. If economic growth accelerates,
interest rates will rise, as well, hurting
shale oil producers.
The other problem is technological.
Fracking, the technique needed to break
up shale rock to get to the oil and gas layers located in-between, is not especially
friendly to the environment. It requires
vast amounts of water, chemicals and
sand to be pumped into wells. Residents
have been up in arms in some densely
settled areas, and their opposition will
raise the cost of producing shale energy
still higher while reducing the amount of
recoverable oil and gas. In some countries, notably China and India, the shale
boom may not even happen, at least in
the near future, because of the scarcity
of water in the areas where shale oil and
gas deposits are located.
Finally—and most importantly—while
yielding a lot at the start, shale oil and
gas wells tend to be exhausted faster than
conventional ones, which in some cases
produce for decades. Shale gas wells, for
example, typically halve their output
after the first year of operation. Now
that the most accessible and productive
deposits have been worked, companies
are forced to drill thousands of new wells
every year just to keep up production.
Producers may have to spend $35 bil-
lion annually on new drilling—much of
it in borrowed funds. The government
warns that all technically recoverable
shale gas will be pumped out by 2030.
While oil bulls cast doubt on shale en-
ergy production, oil bears scrutinize the
demand side. There is no question that
demand for energy has exploded thanks to
faster growth in emerging economies and
the expansion of the global middle class.
However, just as shale energy producers
have relied on cheap, plentiful money, so
the ongoing global economic boom owes
much to worldwide monetary ease. An
eventual tightening could send a number
of countries into an economic downturn.
A self-correcting mechanism also
exists in oil prices. True, many Chinese,
Indians and Brazilians have been eager
to get behind the wheel of a private car.
But would they drive quite as much if oil
prices rose to $150 per barrel? A number
of poor countries provide fuel subsidies
for their consumers, shielding them from
the impact of still-high gasoline prices.
However, fiscal retrenchment has now
become global, and governments are
being forced to cut or eliminate such
subsidies to save money.
The fracking boom is unlikely to be the
panacea some of its supporters have been
touting. There are considerable deposits
of shale oil and gas around the world
but there are plenty of reasons why it
will be costly or technically difficult to
tap them, and why some deposits may
prove non-recoverable. More to the
point, even a highly successful shale oil
revolution will not disprove the peak oil
theory: Eventually the world will run
out of oil, no matter how many more
unconventional reserves we discover.
But pessimists are also wrong. Shale
energy has already had a substantial impact
on energy markets, proving it is no flash
in the pan. One reason it will continue to
play a major role is that technology does
not stand in place. Shale oil and gas will
keep getting cheaper as technology devel-
ops and economies of scale are achieved,
allowing producers to recover more oil
and gas, and to do so more cleanly.
Technology is key. Since the advent
of the IT revolution we have discovered
that old style jobs in manufacturing and
services simply don’t pay well and are be-
ing automated out of existence. What pays
instead is innovation. The same is true
of the production of natural resources.
Even though commodity prices have been
historically high, simply pumping com-
modities out of the ground is ultimately
a race to the bottom. That’s because the
innovative economy of today will inevi-
tably discover cheaper ways to produce
those commodities, or find substitutes for
them and ways to use them less.
All of this will be happening in and
around the shale energy industry. Lique-
fied natural gas has opened up overseas
markets for U.S. shale gas. In a few years
LNG will provide for energy security in
Western Europe vis-à-vis Russia, currently
its main natural gas provider.
Aside from cutting costs, improving
recovery rates and making production
safer for the environment, innovation
will move in the direction of energy
saving technologies and toward other
forms of energy, including renewable
energy. Ironically, investment in innovation will be spurred if oil prices stay
near their current levels or temporarily
Alexei Bayer is an economist based in New
York City and author of Murder at the
Dacha, a novel.