Without shale, oil prices would be a lot higher

Public attention usually focuses on shale from the perspective of local business benefit or environmental concern. Holding down prices doesn’t figure as a benefit but it’s a story worth telling.

Even with Saudi Arabia pumping oil at its fastest clip in decades, oil prices remain stubbornly high. For example, the world’s oil benchmark, Brent crude, recently hovered above $110/barrel. And it’s now been more than 1,000 days – a record – since U.S. gasoline prices were lower than $3/gallon.

The price uptick stems from two familiar problems – tight supply and political instability, mostly in the Middle East and, this time, in Syria and Egypt. While neither country produces much oil, fears persist that instability in those two countries might spill across borders affecting vital chokepoints – either the Hormuz straits (if Iran counters a western attack on Syria), or Suez Canal operations, or both. 

{mosads}These anxieties have seesawed up and down in recent months. Now there’s another factor: Clan and tribal wrangling in Libya has cut its daily oil export by over a million barrels/day. It’s not just a problem of lost quantity; there’s also lost quality, as Libya’s ‘sweet’ (low sulfur) crude fetches a high premium.

Libyan supply problems enmesh with the Egypt/Syria risk overhang, putting upward pressure on prices. These intersect with a third factor, the simultaneous production fall-off in Nigeria and Iraq. The upshot of all this: A global oil shortfall of about 2.8 million barrels/day.

That’s where Saudi Arabia’s ‘swing supplier’ status should come to the rescue of price stability. In recent weeks, and as it has in earlier periods of excessively tight supply, the kingdom has ramped up production to cover the gap. But making up global shortfalls isn’t as easy as it used to be. Total spare world production capacity has dropped in the last few years, from five million barrels/day down to three – a dangerously thin cushion against further supply disruptions. 

If there’s any good news in this, it’s that prices would have been much, much higher if shale-extracted U.S. oil hadn’t been in the global supply mix. By mid-2013, total American oil production hit its highest level since 1989. During last year alone, U.S. oil producers added an extra million barrels/day, the largest one-year increase in American history.

It’s an astonishing turnaround. Just seven years ago, domestic oil production had been seen for decades in seemingly terminal decline. To measure the sea change, consider that the state of Texas is now producing more oil than Iran. 

Some see the shale revolution as over-ballyhooed, a one-shot wonder which only temporarily high oil prices have enabled. There’s a consensus that investment in shale production needs an oil price floor of around $80/barrel. Yet this overlooks the constant, cost-cutting impact of new efficiencies and technical tweaks to the process of hydraulic fracturing, some of it driven by environmental concerns.

One thing is crystal clear: Without shale, the current 2.8 million barrel/day oil production shortfall would have been much greater. Not only would oil prices be well above $115/barrel, but they might have spiked closer to the $150/barrel seen back in the summer of 2008.

The Paris-based International Energy Agency now identifies Canada and the U.S. as two of three players putting sizeable new oil production into world markets over the next decade. (The third, more problematic, is Iraq.) New production will meet surging demand from developing economies and replace traditional exporters’ declining supply. For example, Malaysian, Mexican and Venezuelan production has fallen in the past few year, as fields mature and new investment lags.

Oil from shale thus augments and balances world markets. On the natural gas side also, lower prices have flowed from abundant supplies extracted from shale. Consider how European companies, facing 3:1 natural gas price differentials between Europe and North American, are contemplating the moving of their operations to the U.S. and Canada. Environmentally, consider how cheaper natural gas has been accelerating retirement of coal fired power plants across the country and their replacement by plants burning this cleaner fuel. Economically, the data now show the shale revolution’s convincing economic and demographic revitalization of many parts of the U.S. heartland.

These would all seem to be good reasons for welcoming, with safeguards, the continued growth of oil and gas extraction from U.S. shale production. Its place as price stabilizer, in the midst of supply uncertainty and political volatility, deserves more recognition. Bringing new production to the markets, and thereby holding down oil prices, has critical importance both to America’s own recovery and to global economic prospects.

Clad is an international political risk consultant and was U.S. deputy
assistant secretary of defense for Asia Pacific Affairs from 2007-09.


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