Energy

Shale oil dynamics

August 26, 2014

Global

August 26, 2014

Global
Victoria van Lennep
Contributor, The Economist Intelligence Unit

Victoria is Head of Operations at Lendable, a peer-to-peer lending platform. Previously Victoria worked as a deputy editor in the EIU's Thought Leadership team. She holds a Bachelor and a Master in Economics from the Universite Libre de Bruxelles, and an MSc in Environmental Policy from the University of Oxford.

Since 2008 the production of shale oil (oil held in shales and other rock formations from which it will not naturally flow freely) in America has surged from 600,000 to 3.5m barrels per day, as reported by the Energy Information Administration. How is the take-up of shale oil sources in the US affecting the global energy market? We asked Joan MacNaughton, executive chair of the World Energy Trilemma for the World Energy Council.

The Economist Intelligence Unit: What are the near and long-term prospects for the production of shale oil in the US?

Shale oil has risen exponentially in the US in the past few years, thus reducing the country’s reliance on imports and prompting analysts to believe it could be the world’s largest oil producer by 2020. While shale oil will continue to grow in the near term, it will plateau by the late 2020s or early 2030s, according to the International Energy Agency.

Oil production is affected by two competing factors: price expectations relative to the cost of oil production; and overall demand, which is driven by policies either encouraging consumption (eg, subsidies) or discouraging it (eg, fuel-efficiency standards). This makes it difficult to judge what the net effect of those two competing factors will be.

What are the likely implications of the US’s diminished dependence on oil imports on the global oil market?

Considering the forecast oil production plateau in the mid-2020’s, the US’s reduced dependence on oil imports from the Middle East will be a temporary phenomenon. Even before oil production stagnates, however, the US could benefit from being part of a highly fungible and liquid global market for oil.

Why hasn’t shale oil soared in Europe to the same extent as in the US? 

The prospects for shale oil depend on policy and public acceptance, which is why Europe will never reach the same level of production (relative to its potential) as the US. European states are smaller and more densely populated, while two of the US’s Midwest fields are bigger than the whole of France. The impact of shale oil extraction on the landscape is indeed significant: for example, the extraction of shale oil requires numerous rigs and the removal of waste products (eg, water).

Although critics of shale oil point to the above-mentioned technical constraints, such issues tend to be resolved if there is sufficient market demand. So public acceptance, rather than technical constraints, is the main determinant of shale oil take-up in Europe.

How is the future of renewable energy affected by the US’s oil boom?

The future of renewable energy mostly depends on policy: the removal of fossil fuel subsidies will provide an important boost for renewable energy, as will efforts to capture the price of carbon in energy consumption. Reaching an ambitious agreement at the UN Conference on Climate Change in Paris on capping future carbon emissions to levels compatible with limiting the rise in global average temperatures is also key. It would underpin investors’ confidence in renewable energy and help to scale it up.

In spite of the US’s shale oil boom, I expect there to be a convergence globally in the development of renewable energy. According to Bloomberg New Energy Finance (BNEF) figures, investment in renewables in Europe has tailed off compared with Asia in particular, whereas a few years ago Europe was leading the way.

This article is part of a series managed by The Economist Intelligence Unit for HSBC Commercial Banking. Visit HSBC Global Connections for more insight on international business.

Receive forward-looking perspectives from our editors - Subscribe now for our Weekly Digest