Fracking and horizontal drilling have sent supplies through the roof and prices through the floor, and things are likely to stay that way
Oil price rises over the past 40 years have been truly spectacular. In constant money, the price of oil rose by almost 900% between 1970 and 2013. This can be compared with a 68% increase for a metals and minerals price index, comprising a commodity group that, like oil, is exhaustible. In our view, it is political rather than economic forces that have shaped the inadequate growth of upstream oil production capacity, the dominant factor behind the sustained upward price push.
But we believe the period of excessively high oil prices has come to an end. The international spread of two revolutions will assure much ampler oil supplies, and will deliver prices far below the highs that reigned between the end of 2010 and mid-2014.
Beginning less than a decade ago, the shale revolution – a result of technological breakthroughs in horizontal drilling and fracking – has turned the long run declining oil production trends in the US into rises of 88% from 2008 to 2015. Despite current low prices and the damage done to profits, an exceedingly high rate of productivity improvements in this relatively new industry promises to strengthen the competitiveness of shale output even further.
A series of environmental problems related to shale exploitation have been identified, most of which are likely to be successfully handled as the infant, “wild west” industry matures and as environmental regulation is introduced and sharpened.
Geologically, the US does not stand out in terms of shale resources. A very incomplete global mapping suggests a US shale oil share of no more than 17% of a huge geological wealth, widely geographically spread. Given the mainly non-proprietary shale technology and the many advantages accruing to the producing nations, it is inevitable that the revolution will spread beyond the US.
We have assessed the prospects of non-US shale oil output in 2035, positing that the rest of the world will by then exploit its shale resources as successfully as the US has done in the revolution’s first ten years. This would yield rest of world output of 20 million barrels per day in 2035, which is similar to the global rise of all oil production in the preceding 20 years – a stunning increase with far-reaching implications in many fields.
Another related revolution is beginning to see the light of the day, but news about it has barely reached the media. It is being gradually realized that advancements in horizontal drilling and fracking, technologies normally associated with shale, can also be applied to fuller extraction from conventional, but old and tired, oil fields. If the rest of the world applies these techniques to conventional oil, as the US has done in recent years, this would yield a further addition of conventional oil amounting to 20 million barrels per day by 2035.