Is the Shale Oil Revolution Vanishing? Essay Example

Up until a few years ago, the future of America’s energy supply showed little promise. Domestic productions of both natural gas and oil were progressively fading. Major American energy companies turned away from mainland United States because they were convinced that there was no opportunity for energy production unless they operated abroad. This was all turned around when a growth in innovation allowed for manufacturers to extract large quantities of natural gas at bay in shale deposits that were previously inaccessible. Such a phenomenal event resulted in US gas prices to be cut down to nearly a third of the world’s average. (Adam Lyons 1-2) (Saumay Gupta 2)

For the US, natural gas has been remarkably beneficial for the economy. The use of gas in the US has stimulated manufacturing practices, with investors financing and strategizing hundreds of billions of dollars on new plants for chemical, aluminum, and steel production. This shale boom has generated hundreds of thousands of new high-paying jobs for the middle class. Currently, more than one million Americans work in the natural gas and oil industry — an increase of roughly 40 percent from 2007 through 2012. (Adam Lyons 2-3) Furthermore, since natural gas is currently supplying nearly 25 percent of total energy consumed in the US, the shale boom is actually saving US consumers hundreds of billions of dollars every year. Along with the other benefits, these savings have provided the US economy a long-term and stable economic advantage over any competitors and helped the country retract from 2008’s Great Recession. (Adam Lyons 2-4) (Maugeri 1)

Although numerous other countries throughout the world might envy this catalyst for domestic development, they will not be able to replicate it, because only the US holds these unique and necessary ingredients to fully develop resources of shale. A legal system which preserves private ownership of land and any resources under it, along with any open capital markets and a generally accepted standard system, has led to the development of thousands of independent natural gas and oil companies, all of which are engaged in intense competition with each other. As a result, nearly four million natural gas and oil wells have been drilled into the US, contrasting to the 1.5 million drilled throughout the rest of the world. The clamor of active drilling in the US has also led to an increase in innovation within the industry on an order of magnitude which other countries are simply incapable of. (Maugeri 1) (Mobbs 2)

Although other countries, such as Russia and China have reasonable shale resources, they do not possess the entrepreneur-friendly system that is necessary to develop such resources quickly and efficiently. Just as long as politicians do not interfere with industry growth, the US will profit greatly from the shale revolution for decades still to come. (Maugeri 1)

Since World War II, US policy-makers have shown interest in how dependent the country has become on imported fuel. Such concerns have highlighted the events of pivotal increases in oil prices leading to stagnation, economic recession, and significant inflation throughout the 1970s. Recent advances in oil and gas production in the US however, are changing the directions of strengths and weaknesses regarding energy in the US. What has come to be known as the shale revolution, referring to shale oil, has prompted a significant amount of production of natural gas and oils in the US. Thanks to technological advances with natural gas and oil production, this revolution makes use of a combination of methods for production such as hydraulic fracturing and horizontal drilling. Such advances in technology along with the increased gas and oil prices have led to increases in production of the ample oil and natural gas resources within the US. (Saumay Gupta 5) (Denver 12-13)

The revolution of shale oil provides for a great number of profits and employment opportunities. It stimulates the optimism for economic recovery in the US. Certainly, the increase of hydraulic fracking mechanisms from Montana, to Texas, all the way to Pennsylvania has significantly upped oil production in the US from 5.6 million barrels per day in 2010, to a present rate of 9.3 million. Leading up until late 2014, it was generally accepted that US output would continue to increase in increments of at least 1 million barrels annually for the next several years. The recent decline in oil prices imposed a major threat to those who are in favor of fracking. (Adam Lyons 6-9)

Regarding the economics of oil fracking—the costs to drill conversing with what oil presently sells for—is threatening  for the shale oil boom. At best, current producers might be able to keep production in close range with current levels. What is significantly at risk is the marketed cash cow that virtually everybody assumed was inevitable just months ago. (Kassotis 7-8)

The production of shale oil is not like drilling in the other aspects of the global market. Normally in conventional oils wells, the wells function through extensive cycles. Generally the supply of crude oil produced by these conventional wells steadily declines by anywhere between 2 percent and 5 percent per year. Consider a well that can generate two thousand barrels per day for its first year of operation. After just a year of depreciation, that well will now only be able to generate a yield of somewhere between 95 percent and 98 percent through its second year of production. However, because the output from production only declines at such a steady rate, the wells usually continue to operate for 20 plus years. (Adam Lyons 10-12)

Because the wells are able to operate this long, this accounts for significant volatility regarding the price of oil. Oil producers strategize their projects predicting to redeem their initial investment needed to locate the oil and plant the well. This accounts for their fixed costs. The costs of actually extracting the oil itself which are primarily attributed to labor costs and electricity are what account for variable costs. In this business, companies only choose to invest when they are able to forecast impending prices much greater than the total disbursement of both variable and fixed costs with hopes of generating large profits. Prices of energy continually decline much less than what is needed to return the full cost, making it hard to generate a profitable return. This was typically the case throughout the 1990s. (Maugeri 1) (Adam Lyons 11-13)

However, when the price of oil dropped in the early 2000s neatly all of the conventional wells continued to operate. This is because variable cost of lifting crude oil is still much lesser than the prices it carries on the global market. Wells that are ten years old usually have variable costs of only 20 to 30 dollars per barrel. So, their owners continue to produce at prices ranging from 60 or 80 dollars, even though it would need 100 dollars of oil to receive an adequate return on their initial investment. In other words, the money spent to drill the well is rendered irrelevant. The only thing that matters is that the funds they are able to generate more than what is needed to syphon out the crude oil every day. (Kassotis 9) (Rosenman 6)

As a result, the world supply of oil is what most economists refer to as inelastic. Even if the prices fold, the producers continue to pump steady quantities. They will only discontinue as prices fall below the variable cost. This rarely happens with most wells however. (Rosenman 6-7)

So, the main element currently concerning oil prices is demand. Because the supply typically will not drop with a decline in the global need for oil, a decrease in demand generates excessive and exaggerated prices. Naturally, conflicts between oil producing countries may cause temporary shortages that cover falling consumptions. However, when the production returns inevitably to regular levels, demand weakens and prices fold. That is currently taking place. US oil consumption has fallen by more than 8 percent since 2010. The decline in Europe is even more significant than that. Meanwhile, India and China have not shown to be nearly as avid as forecasted. The drop in prices of oil from more than 100 dollars in May to 48 dollars has not been the cause of any decline in production. This remains true even in high cost locations such as Canada’s tar sand areas. (Denver 15-16)

To generate increasing and consistent revenue, producers are required to continuously drill new wells, because their existing wells last only a half-life by the industry standards. Fracking is much more related to mining rather than conventional production of oil. In the fracking process, there is significant pressure to keep replacing the production that was lost in the previous year. On average, the break-even cost of US hydraulic shale oil is about 65 dollars per barrel. So, with the present price being 48 dollars, the industry is under badger. (Denver 16-19)

Beyond the costs, fracking has its benefits. The fracking method has enabled a rise in US energy production, access to natural gas and substantial petroleum deposits stuck in shale formations. Stakeholders and the industry seldom complain as energy prices decline. Decreasing importations from unstable nations of the world has a significant appeal. On top of that, natural gas releases about half as much carbon dioxide as that of coal, enabling it to potentially serve as a substitute fuel to cleaner energy which of course is supported by the majority of stakeholders. (Denver 26-27)

Despite such advantages, fracking still remains greatly controversial, mostly because of the potential damage it may impose on human health as well as the environment. There are reports of fracking operations that are contaminating aquifers. Research has also found evidence of increased rates of silicosis among the well workers and even heightened risks of cancer due to air pollution. (Denver 7-9)These issues have led to a number of towns trying to put a ban on the fracking practice. However, in order for energy to remain secure and stable, fracking is simply a requirement for the energy industry. (Kevin Taylor 1) (Saumay Gupta 4)

In many democracies, development is also being impaired by due to greed. Unlike people in Texas or Oklahoma, who were raised with the oil and gas industry, most foreign populations are usually not familiar with it; most of the 1.5 million natural gas and oil wells outside the US are located either in deep off shore waters or remote on shore locations. (Adam Lyons 9-11) Since governments in other countries own and control virtually all of the underground rights for resources, landowners have no say in decision making. Receiving none of the economic benefits and facing only the down sides of any intrusive projects within their own land, they justifiably have a tendency of resisting any drilling projects. (Kevin Taylor 1)

The case is similar in Europe; where the problems are magnified by a hyper-active green movement decide whether or not to block the development of shale oil production. Without a significant change in their attitude, Europe may take even longer than China to develop any shale oil resources. Even they are able to develop them, the results will not be as effective and will take significantly more time. (Rosenman 3) (Rifaat 1)

The bottom line is this; because of the shale oil revolution, the US has already insulated itself from unexpected changes in global natural gas prices and is coming very close to doing the same in regards to that of oil prices. Domestic oil shortages resulting from foreign natural disasters or political interferences may one day become a thing of the past, especially if natural gas starts fueling US vehicles. Progressing independence of energy can grant the US a one up on their competitors. If the flow of oil is ever threatened by some unexpected event in the Middle East, like the fall of the Saudi regime, the US will be able to weather the storm better than any other economy. (Denver 24-27)

Because oil is priced on an international market, inclined domestic oil production will not do much to lessen the prices for US consumers, as any advances in US production will be spread throughout the international market. More reliance on domestic oil resources as substitutions for imports can reduce the economic vulnerability to oil supply disruptions, but perhaps not significantly. (Maugeri 5-6)

Decrease in energy use has tightened the vulnerability of the US economy to oil price shocks. A similar concept is experienced at the state level, with many state economies having diversified from energy-using industries. At the same time, the progressing prominence of energy production will make states with small, un-diversified economies more prone to an economic down fall during a decline in energy prices. (Maugeri 6) (Rosenman 17-18)

Bibliography

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Denver, University of Colorado. Policy And Management Of Hydraulic Fracturing. 2014. 12 April 2015. <http://www.ucdenver.edu/academics/colleges/SPA/natgasdev/Pages/default.aspx>.

Hoose, Natalie Van. Purdue ag economists: Shale oil ‘dividend’ could pay for smaller carbon footprint. August 2014. 12 April 2015. <http://www.purdue.edu/newsroom/releases/2014/Q3/purdue-ag-economists-shale-oil-dividend-could-pay-for-smaller-carbon-footprint.html>.

Kassotis, Donald. ““Estrogen and Androgen Receptor Activities of Hydraulic Fracturing Chemicals and Surface and Ground Water in a Drilling-Dense Region”.” Endocriminology (2013): 7-16.

Kevin Taylor, Cathy Hollis. Mineral precipitation and remobilisation in carbonate-rich unconventional shale. n.d. 12 April 2015.

Maugeri, Leonardo. “”The Shale Oil Boom: A U.S. Phenomenon”.” Belfer Center for Science and International Affairs(2013). 12 April 2015. <http://belfercenter.ksg.harvard.edu/publication/23191/shale_oil_boom.html>.

Mobbs, Paul. Case study 2: Academic involvement in major shale gas studies. 17 March 2015. 12 April 2015. <http://www.talkfracking.org/frackademics/frackademics-case-study-2/>.

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Saumay Gupta, Monik Gandhi. Shale Oil and Gas Revolution: Is India Ready? 2013. 12 April 2015. <http://www.academia.edu/9825466/Shale_Oil_and_Gas_is_India_Ready_>.