MAJOR oil exporters are warned they could see a significant deterioration in their balance of trade if they fail to develop their own shale oil resources. Countries such as Russia and the Middle East could see a drop of around four to 10 per cent of GDP, according to a study by accountancy firm PwC.
The United States, the largest oil consumer in the world, is leading the shale revolution. But while it enjoys many economic benefits, the shale revolution has several geopolitical implications.
The US is not the world’s largest holder of shale oil resources – Russia is. However, there are doubts over whether other countries can successfully replicate the US experience.
It remains uncertain what impact the shale oil boom will have on the price of oil. Experts expect a drop in oil prices. However, adverse political developments can change all this.
In 2009, US oil production reversed its declining trend. Within four years, production of shale oil or – more accurately – tight oil increased by 217 per cent, reaching 2 Mb/d by the end of 2012 and accounting for more than 30 per cent of the country’s total production. US production grew more in 2012 than in any year since the beginning of the domestic industry in 1859. Compared to 2011, production in 2012 increased by 15 per cent, 92 per cent of which came from shale oil.
The direct economic benefits to the US include job creation; additional taxes paid by upstream producers; improvement in the balance of trade as oil imports slowed; and an improved sense of energy security. Between 2008 and 2012, US oil imports from the Organisation of the Petroleum Exporting Countries (OPEC) declined by 26 per cent.
Experts argue that, geopolitically, as the US becomes less dependent on oil imports especially from the Middle East, it will become less involved (directly and indirectly) in that region. However, unrest in the Middle East can cause spikes in the price of oil – which will be felt globally. Self-sufficiency does not mean independence from international oil prices. The difference, however, is that the redistribution of wealth in the US would flow from consumers to domestic producers instead of to foreign suppliers.
According to shale resource estimates by the Energy Information Administration (EIA) in 2013, global resources of technically recoverable shale oil are estimated at 345 billion barrels (bnbls), adding approximately 11 per cent to the 3,012 bnbls of technically recoverable oil resources.
Although the US, the largest oil consumer in the world, is leading the shale revolution, it is Russia which is sitting on the largest resource base. China too holds substantial resources.
What spurred activity in the US, apart from its resources, was a combination of factors – including high oil prices, advances in technology, private ownership of below ground mineral rights, well established service industry and infrastructure, water availability, competitive fiscal terms and an overall investment friendly environment. Experts argue that other countries do not possess a critical mass of these qualities and as a result they doubt that the US experience will be fast replicated elsewhere.
Production of shale gas has significantly reduced domestic gas prices in the US. In the case of oil, the US consumer will still face a price set in a global market, i.e. through the interaction of global supply and demand.
On the supply side, OPEC’s decisions on output will have a major impact on the oil price, since the organisation accounts for 43 per cent of world oil production. Traditionally, OPEC cuts production to support prices. This might become more challenging as new unconventional oil resources are brought on stream.
The PwC study concludes that the increase in shale oil production could reduce oil prices in 2035 by around 25-40 per cent (US $83-100/barrel in real terms) relative to the current baseline EIA projection of US $133/barrel in 2035.
If this materialises, OPEC members and other oil exporters will face a challenging environment.