The US is set to take over from Saudi Arabia as the world’s biggest oil producer. What does this mean for the global economy – and investors? James McKeigue reports.
What’s happened?
America is set to be the world’s top oil producer by 2020, overtaking Saudi Arabia, according to the International Energy Agency (IEA). The IEA, the West’s energy watchdog, reckons US production will hit 11.1 million barrels per day (mbd) from 8.1 mbd today.
A similar boom in gas – which is already well advanced – will push it past Russia as the world’s biggest gas producer by 2015. The extra oil supplies, along with falling demand from consumers, will see America’s oil imports cut in half over the next decade.
How is this possible?
It’s all down to unconventional oil – known as ‘shale oil’ or ‘tight oil’ because it is trapped in hard-to-get-at shale rock. Geologists have long known that America has vast reserves of shale oil – around five times Saudi Arabia’s total oil reserves – but until recently, it has never been economically feasible to extract it.
But in the last decade, improved drilling techniques and higher oil prices have made it worthwhile getting the stuff out of the ground. A similar story with shale gas has already made America self-sufficient in natural gas.
Who are likely to be the winners?
By 2035, America’s oil imports will fall to two mbd from around ten mbd today, which should help turn around America’s trade deficit (the gap between the amount it imports and what it exports). The extra oil production already in place has improved the country’s current account and pushed overall imports to their lowest since 1998.
This will have a big impact on the dollar, as James Mckintosh points out in the Financial Times. “A stronger current account means a stronger currency in the long run… With the dollar close to the weakest it has been since 1973 in real terms, the success of shale should support a long-term bet on the currency.”
Also, if booming oil supplies see America achieve energy independence, it might not need to sustain as large a presence in the Middle East. If America was to withdraw from the region, the defence savings could be used to cut public spending.
Asia, meanwhile, is likely to become the Middle East’s biggest customer base. As America’s shale oil revolution spreads, it will trigger similar efforts elsewhere, although as we’ve seen with shale gas that can take time. This would benefit the international oil companies (IOCs) and leading oil and gas service companies.
Ever since Mexico kicked Western oil firms out of the country in 1938, IOCs have lost ground to increasingly assertive national oil companies (NOCs) around the world. But as more of the world’s oil comes from unconventional plays like shale, it hands the advantage back to the technologically superior IOCs.
Apart from Brazil’s Petrobras or Norway’s Statoil, the NOCs generally lack the technical skills or capacity for innovation to exploit shale. The huge surge of investment in the infrastructure and technology needed to extract, store and transport this energy will boost leading IOCs and service companies.
What about the losers?
‘Losers’ might be a little strong but American manufacturers might not benefit quite as much as some pundits think. For starters, a stronger dollar would make them less competitive. Moreover, shale oil is unlikely to cut US petrol prices in the same way that shale gas cut the country’s natural gas prices.
That’s because, unlike gas, oil is a global market and US firms will pay world prices, regardless of how much America produces. America’s extra three mbd of extra oil may help push prices down – current global demand is around 90 mbd – but the benefits will be shared with global competitors.
It’s also likely that new export facilities will be built to send excess shale gas abroad. That would end the gas glut in the US and increase domestic natural gas prices. The flood of shale energy is probably bad news for renewable technologies too.
As the glut of shale gas cuts US natural gas prices, it forces down coal prices too. This makes it even tougher for alternative renewable technologies like solar or wind to compete on costs. What’s more, this comes at a time when governments in Europe and the US seem to be losing the appetite, and the wherewithal, to subsidise renewable energy.
Could anything stop the shale oil revolution?
Shale oil and gas is extracted by pumping lots of water and chemicals into the rock to release the oil. If handled badly the process can contaminate water supplies. In some areas it has also caused minor earthquakes. Even if those problems can be managed by tight regulations, the massive water needs will be another problem.
It varies depending on the geology, but up to five barrels of water are needed to produce one barrel of shale oil. If water becomes scarce, it is likely to be given to farmers before oil companies. Another issue is the cost.
America might end up pumping more oil than Saudi Arabia, but it’s nowhere near as cheap. Saudi Arabia, and other Middle Eastern producers, generally have large reservoirs of conventional oil that is easy to extract. Extracting shale oil, however, is much more expensive.
Gail Tverberg in Business Insider estimates that US shale oil needs to sell for $80 a barrel to be worthwhile for producers. If the oil price fell for a sustained period of time, so would shale oil production.