Shale Oil Discovery And Impact On Global Oil Market

LightCastle Analytics Wing
March 5, 2014
Shale Oil Discovery And Impact On Global Oil Market

Conventional sources of energy, such as crude oil, have been dominating the global energy market for centuries. The demand for oil is substantially high, given that most industries depend on it for fulfilling energy requirements. Even with the advent of renewable energy, economic realities enforce the use of fossil fuels. As a result, countries that extract crude oil and process it into usable fuels have been widely benefitted – Saudi Arabia and Venezuela, for instance. Unfortunately enough, the glory of monopolizing the energy sector will soon become a shattered dream for OPEC. This is due to the discovery of Shale Oil.


Fig: Comparison of world’s total oil production.

Shale oil is a source of energy quite similar to conventional oil. It is extracted from oil shale, which is an organic fine grained sedimentary rock containing kerogen (a mixture of organic compounds). The pyrolysis of Oil Shale produces a vapour, which can then be used to produce shale oil and shale gas. Oil Shale is discovered using drilling rigs by a method called “hydraulic fracturing” or “fracking”. The high production cost of this fuel is compensated by the high abundance of Oil Shale in countries such as USA, Brazil, China and Russia. The following diagram shows greater detail of the refining process:
Fig: Process of Shale Oil extraction.
The United States is currently the largest manufacturer of Shale Oil (and Shale Gas), with an estimated reserve of 1.5 to 2.6 trillion barrels, which is over 62% of the global reserve. Both the government and private companies have made an active effort to utilize this newly discovered resource. Some of these efforts were rather drastic. For instance, 90 new wells were added every month in Dakota’s Bakken to maintain a production of 770,000 barrels per day. The United States currently employs 60% of the drilling rigs available globally, among which 95% can conduct hydraulic fracturing.
There are other countries, such as China and Estonia, which also manufacture Shale Oil. However, these nations have certain limitations which disallow them to produce on such a large-scale. US has an advantage in the production of Shale oil for the following reasons:

  • Most of the regions containing Kerogen have low population densities. Therefore, the socio-economic costs of relocating citizens is avoided.
  • The government puts in a great amount of effort in facilitating the extraction of Shale Oil, starting from the setting up of universities and training facilities to removal of environmental restrictions.
  • The mineral extraction rights of corporations is relatively high.

Furthermore, US also manages to reduce production costs by increasing drilling intensity. The resultant increase in supply permits necessary price drops. Leonardo Maugeri of Harvard Kennedy School claims that “Forecasts show that the USA just might become the largest oil extractor in the world in a few decades”.

Screen Shot 2013-03-04 at 6.26.03 AMFig: Increase in oil- extraction activity in USA over the past few years.

The impact on the global oil market and the world economy is paramount. First and foremost, the United States will become more self-sufficient in its energy requirements over a few decades. This would mean that US oil imports will drop significantly. There are two major effects of this:

  • Exports from OPEC nations will reduce sharply. The highest economic damage will be experienced by Saudi Arabia, the largest oil importer to USA. Saudi Arabia is already under the potential threat of a growth in the Iranian oil market. If USA removes its oil interests from Saudi Arabia, the largest oil extractor in the world will slowly lose its economic and political hegemony over the Middle East. It is also important to note that China, Brazil, Russia and many other nations are also moving towards Shale Oil. This game theoretical phenomenon will further hurt the OPEC nations.
  • Since US imports will drop, it will lead to the inevitable appreciation of the dollar. The effect of this ranges from a (theoretical) decrease in US exports to favorable balance of payments for US backed nations. Since USA is an integral component in the world economy, there are spillovers in a wide range of areas.

The ability of USA and other Shale Oil producing nations to increase production and reduce prices will increase their share of the global oil market. This market shift, however, can only occur if Shale Oil can be made more commercially feasible. Of course, the discovery of the cheaper methods to extract crude oil can cause a strong hindrance in the growth of the Shale oil industry.
One topic that has not yet been discussed is the environment. The extraction of Shale oil and shale gas are quite detrimental to the environment, even more so than crude oil. This brings a new trend in mind. More and more nations are moving towards green technology and reduction of carbon footprints. A success in the move towards green technology might repress the potential of Shale oil. However, a drastic change in global environmental regulations is quite unlikely, and hence, should not be much of a worry.
The demand for fuel will keep increasing, since an increasing number of countries are becoming more industrialized. China, for instance, are on the brink of becoming the world’s largest importers of oil. This means that both Shale oil and conventional oil have the opportunity to grab a fair share of the energy market. All we know is that the discovery of Shale oil will certainly leave its mark on the energy sector and the world economy.

WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a systemic and data-driven approach to create opportunities for growth and impact. We are an international management consulting firm which creates systemic and data-driven opportunities for growth and impact in emerging markets. By collaborating with development partners and leveraging the power of the private sector, we strive to boost economies, inspire businesses, and change lives at scale.

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