It has become obvious to oil observers over the years that the oil landscape is not a constant, and it keeps changing because of diverse reasons. Many of us remember the quadrupling of oil prices in the early 1970s in reaction to an oil embargo that lasted for several months and the more than doubling of those prices following the 1979 Iranian Revolution. Those observers also understand the collapse of oil prices in the mid-1980s due to higher non-Organization of Petroleum Exporting Countries production and conservation in response to the multiple price increases in the 1970s. Many of us remember the 1991 Gulf War and the 2003 Iraq War, which both significantly reduced world oil production capacity. We recently reached a peak of $147 per barrel in summer 2008 and then subsequently collapsed to $30 per barrel at the beginning of 2009.
Now the price is about $100 per barrel, jolted up by the continuous revolution in Egypt, which has been a big participant in what’s infamously known as the Arab Spring. Some oil analysts believe that the price would be at the $147 level that it achieved in summer 2008 if it hadn’t been restrained by a recent major change in the oil landscape. This is the oil shale revolution. The combination of two existing horizontal and vertical drilling extraction techniques into one superior technique quadrupled natural gas reserves and also significantly increased oil reserves in the United States, which consumes 25 percent of world oil production (estimated now at about 89 million barrels per day). Oil production in the United States has increased by 1.8 million barrels per day in the last two years, and this production is expected to reach 3.9 million barrels per day by 2018. Moreover, the Harvard-based Belfer Center indicated in its report “Oil: The Next Revolution” that shale oil could provide the U.S. with as much as 6 million barrels per day by 2020. The recent production surge has also contributed to an increase in the world spare capacity from 1.5 to 2.7 million barrels per day. This shale revolution has also shifted the balance of power and geopolitics toward the United States and China, but the results are mixed for Europe and negative for the Gulf Cooperation Council countries and other oil-exporting countries.
U.S. production and reserve increases are likely to be reinforced by the development of shale oil resources in China, Argentina, Ukraine and other places. China’s recoverable natural gas shale resources are estimated at 36 trillion cubic meters, which are larger than those of the United States.
This has the potential of adding additional pressure to global oil prices. There is also the potential of using natural gas for transportation and ultimately providing home refueling kits so that U.S. consumers can fill up natural-gas-powered cars in their own garages.
These positive developments in oil reserves and production may have acted as a cushion that has prevented the recent jump in oil prices from significantly passing the $100-per-barrel mark as the Egyptian revolution continues to march on and the spectrum of the violence continues to rage through the volatile Middle East. But obviously the shale “shock absorber” is not large and thick enough to stop or restrain the oil price from jumping from about $90 per barrel to more than $100 in just a few days. The more important question now is whether the “shale cushion” will become thick enough to absorb shocks of the magnitude of the current Egyptian revolution. One thing that is known about the shale reserves is that they deplete much faster than conventional reserves and no one knows for certain how long they will last. We may have a few years of respite or moderation in reaction to oil shocks, but the oil landscape will continue to change, and thus this article is amenable to future updates.
Shawkat Hammoudeh is a professor of economics at Drexel University. He can be contacted at [email protected].