Why Shale Is the Next Shale
Despite its doubters and haters, the shale revolution in oil and gas production is here to stay. In the second half of this decade, moreover, it is likely to spread globally more quickly than most think. And all of that is, on balance, a good thing for the world.
The recent surge of U.S. oil and natural gas production has been nothing short of astonishing. For the past three years, the United States has been the world’s fastest-growing hydrocarbon producer, and the trend is not likely to stop anytime soon. U.S. natural gas production has risen by 25 percent since 2010, and the only reason it has temporarily stalled is that investments are required to facilitate further growth.
Having already outstripped Russia as the world’s largest gas producer, by the end of the decade, the United States will become one of the world’s largest gas exporters, fundamentally changing pricing and trade patterns in global energy markets. U.S. oil production, meanwhile, has grown by 60 percent since 2008, climbing by three million barrels a day to more than eight million barrels a day. Within a couple of years, it will exceed its old record level of almost ten million barrels a day as the United States overtakes Russia and Saudi Arabia and becomes the world’s largest oil producer. And U.S. production of natural gas liquids, such as propane and butane, has already grown by one million barrels per day and should grow by another million soon.
What is unfolding in reaction is nothing less than a paradigm shift in thinking about hydrocarbons. A decade ago, there was a near-global consensus that U.S. (and, for that matter, non-OPEC) production was in inexorable decline. Today, most serious analysts are confident that it will continue to grow. The growth is occurring, to boot, at a time when U.S. oil consumption is falling. (Forget peak oil production; given a combination of efficiency gains, environmental concerns, and substitution by natural gas, what is foreseeable is peak oil demand.) And to cap things off, the costs of finding and producing oil and gas in shale and tight rock formations are steadily going down and will drop even more in the years to come.
The evidence from what has been happening is now overwhelming. Efficiency gains in the shale sector have been large and accelerating and are now hovering at around 25 percent per year, meaning that increases in capital expenditures are triggering even more potential production growth. It is clear that vast amounts of hydrocarbons have migrated from their original source rock and become trapped in shale and tight rock, and the extent of these rock formations, like the extent of the original source rock, is enormous — containing resources far in excess of total global conventional proven oil reserves, which are 1.5 trillion barrels. And there are already signs that the technology involved in extracting these resources is transferable outside the United States, so that its international spread is inevitable.
In short, it now looks as though the first few decades of the twenty-first century will see an extension of the trend that has persisted for the past few millennia: the availability of plentiful energy at ever-lower cost and with ever-greater efficiency, enabling major advances in global economic growth.