From Anti-Fracking Movement to OPEC: Shale Drives New Geoeconomics of Oil

WASHINGTON - The emergence of fracking has modified the global market for fossil fuels. But the plunge in oil prices has diluted the effect, in a struggle that experts in the United States believe conventional producers could win in the next decade.

The U.S. oil industry had peaked - when the discovery of new deposits and output from existing wells begins to fall - which made the country more dependent on imports. But the equation was turned around thanks to the new technique.

"The bubble won't explode, but it will progressively deflate. At current prices, we would see a relatively quick shrinking of capital availability for the shale sector, because those companies are producing at a loss."
--David LivingstonThe innovative technology of hydraulic fracturing or fracking and the discovery of large deposits of shale gas and oil, along with massive investment flows, led to predictions that the United States would become autonomous in fossil fuels this decade. But these forecasts have been undermined by the drop in prices.

"The world is entering a new era of uncertainty in the geoeconomics of oil," said David Livingston, an associate in the Energy and Climate Program of the U.S. Carnegie Endowment for International Peace. "It is far from certain that the notoriously volatile oil market will become less cyclical."

The analyst told IPS that as a result of domestic U.S. demand, "Companies will lose spare capacity, between what they can produce and what they produce, which is important, because the market is determined by that capacity."

After 2003 international oil prices climbed, to 140 dollars a barrel in 2008, when the global financial crisis brought them down.

This decade they rallied, to around 100 dollars a barrel. But they have fallen again since late 2014, to about 40 dollars a barrel.

That means U.S. producers, in particular shale gas producers, are facing extremely low prices, overproduction, a lack of infrastructure for storing the surplus and a credit crunch for the industry's projects, even though prices have gone down.

In addition, China's economic slowdown and Europe's stagnation are hindering the recovery in demand for energy.

The development of shale oil and gas has also put the U.S. industry on a collision course with the members of the Organisation of the Petroleum Exporting Countries (OPEC), especially since one of its widely touted objectives is to reduce imports from that bloc.

Since November 2014, OPEC has kept its production quotas stable, as part of a strategy imposed by the bloc's biggest producer, Saudi Arabia, aimed at keeping prices low and discouraging the development of shale deposits, which are much more costly to tap into than the organisation's conventional reserves.

In late 2014, the Norwegian consultancy Rystad Energy put the cost of producing a barrel of shale oil in the United States at 65 dollars a barrel, which means the industry is operating at a loss. The average cost of extracting a barrel of conventional oil in that country is 13 dollars, compared to five dollars in the Gulf.

For Miriam Grunstein, a professor at the Centre for Economic Research and Teaching (CIDE) in Mexico, the outlook is very uncertain.

"There are doubts for several reasons. First of all, due to the low prices," she told IPS from Mexico, which has begun to explore its significant reserves of shale gas.

"Although it has forced many companies to improve their operating capacity, reduce investments and achieve greater efficiency, they are in an environment where they have to look for markets, in Europe or Asia. But that requires liquefaction infrastructure, which implies major investments," she added, referring to the current situation faced by shale gas producers.

In June, the United States produced 9.3 million barrels per day of crude oil, about half of which was shale oil, according to data from the Energy Information Administration (EIA).

The prospects for the industry are beginning to look less promising. In its Drilling Productivity Report published in late August, the EIA projected a fall in shale gas production in September, for the first time this year, to 44.9 billion cubic feet per day.

The agency stressed that output from new wells is not enough to offset the decline in existing wells.

For Livingston, "OPEC as an institution - and Saudi Arabia, its leader - is likely to emerge from this paradigm shift stronger than before in many ways. With its new strategy - one born out of necessity - the kingdom is emphasizing market share, rather than price, while also moving to delegate the burden of balancing the world oil market to the U.S. shale industry."

The United States would become the new "swing producer," although without achieving the same power as the Gulf producers in influencing the market.

In the long run, total U.S. oil production will tend to drop, according to EIA projections. In 2020, crude oil production is expected to stand at 10.6 million barrels per day; in 2030, 10.04; and 10 years later, 9.43.

In the case of shale gas, projections are favorable, but at higher prices. In 2020, the country should be producing 15.44 trillion cubic feet per day; 10 years later 17.85; and in 2040, 19.58.

In total, the EIA forecasts that the country will produce 28.82 trillion cubic feet per day of natural gas in 2020; 33.01 in 2030; and 35.45 in 2040.

But the average price will go up. This year, the Henry Hub reference price for U.S. natural gas has stood at 2.93 dollars per million British thermal units (Btu), the heat required to raise the temperature of one pound of water.

The price should go up to 4.88 dollars per Btu in 2020; to 5.69 in 2030; and to 7.80 in 2040.

"The bubble won't explode, but it will progressively deflate. At current prices, we would see a relatively quick shrinking of capital availability for the shale sector, because those companies are producing at a loss," said Livingston.

Grunstein said: "Saudi Arabia's aim is to keep the United States from becoming a major exporter. The strong markets exert the most pressure. If demand does not recover, the demand-price ratio is awkward. Consumption is needed, and I don't see where it would come from."

Livingston said one option is to review the 1970s-era ban on exporting U.S. crude oil, because "If production rises, refineries can't process it and therefore new markets are needed."