At the onset of the global financial crisis in the summer of 2008, with oil prices hitting $147 per barrel, no political or energy analyst considered shale oil as an energy game changer. Five years later, the situation has changed significantly.
A widely publicised call from Saudi Prince and investor Alwaleed bin Talal for Saudi Arabia to diversify its oil-dependent economy was only the latest in a stream of warnings that the US shale revolution is threatening the interests of the OPEC countries. Can shale really threaten oil-rich countries? According to the Saudi oil minister Ali Naimi this is not the case, and in his April speech he welcomed the increase in US oil production. However, nervous voices from other OPEC capitals hint that something is taking place in the organisation’s Vienna headquarters.
According to the annual BP Statistical Review of World Energy, US oil production in 2012 rose by 1 million barrels per day – the largest single year increase ever recorded. US imports of oil have been declining since 2005 and some analysts predict that if this trend continues the US will not have to import much of its crude oil by the end of the decade.
At the same time, US exports of crude oil are still subjected to the 1970s US Department of Commerce restrictions that in a few years might heavily strain the capacity of US refineries to cope with the sudden influx of oil from domestic resources and put pressure on Washington to liberalize oil export rules. The significance of shale resources was also reaffirmed by Ernest Moniz, the new US energy secretary, who spoke about the “geopolitical consequences” and the change in the nature of the international energy trade, if China and Europe manage to develop their shale oil and gas resources.
Should this happen, OPEC’s ability to steer and control global oil production and price trends will be significantly reduced. The long-term danger for OPEC lies therefore in the prospective decline in oil prices, but also in the potential of other countries apart from the US to develop their own unconventional oil resources.
The shale revolution might bring a higher level of stability in geopolitical terms by reducing dependence on Middle Eastern oil, but we do not have to expect a dramatic and immediate fall in oil prices. Shale oil production costs are still relatively high compared to production from conventional sources. It is estimated that the production cost for a barrel of shale oil is around $70, compared to $10 for a barrel of conventionally produced oil in the Middle East.
Still, the sudden increase in global oil supplies might slash the price of crude oil from today’s levels of around $100 to about $83 per barrel by 2035, according to the recent PWC report. This will make it much harder for Saudi Arabia and other OPEC countries to simply use their usual tools, such as reducing production, to keep the prices high. But regardless of price scenarios, abundant global supply will inevitably have an effect on oil markets.
Although OPEC is counting on an increase in oil consumption in developing countries, primarily India and China, to substitute the drop in exports to the US and the OECD countries, it must take into consideration these countries’ potential to develop their own unconventional oil resources.
Europe has already shyly started to develop its shale resources. The same goes for China, which has the third largest recoverable shale oil resource globally and is unlikely to miss any chance to strengthen its energy independence.
