What Are the Implications of the American Shale Boom?
by Mashum Mollah Sales 31 August 2017
Hydraulic fracturing, horizontal drilling, and micro seismic imaging have opened a literal treasure trove in oil prospecting and extraction. These methods put together have made the extraction of crude oil from low-permeability rocks a possibility. The oil extracted from hydraulic fracturing (fracking) is called shale.
The use of these methods is prevalent in the US. This means that the US, which was previously a massive importer of oil from Arabian countries, can now manage to meet a large chunk of its needs. This, coupled with the emergence of other players like Nigeria and Libya, has led to the reduction of oil prices globally.
At peak price, a barrel of the black gold went for $145. Recently however, as a result of an increase in supply, a price of over $55 is a hard sell. The increased production of shale by the USA has led to massive gains for the US. What is uncertain is the effect it has had on world markets and mainly OPEC countries. It has effectively changed the whole pricing paradigm.
War between trading blocs
OPEC, in a meeting held in March, acknowledged a shift in the balance of power and ability to dictate world oil prices. Gone are the days when peak oil prices were dictated by OPEC. In a bid to cut the American influence on the world oil prices, OPEC passed to push the oil production cuts through March 2018. However, this only saw the price rise from $46 per barrel then tank down to $53 again. Brent crude, the main international benchmark, has been trading around $49 a barrel when the American benchmark was at $46 a barrel.
The effect of surplus
From producing 102,000 barrels per day from fracking wells, the US now produces about 4.3M barrels per day. This production makes them second to only Saudi Arabia and Russia and has pushed the demand and supply of the commodity through a tailspin. According to the Wall Street Journal, the fracking boom implies that the USA could ultimately be the world’s swing oil producer. The idea of leveraging oil prices for geopolitical power has been curtailed and if an oil surplus is attained, the economies of these countries will take a gut punch and even lead to a slowdown in middle east economies.
The gains and losses
The beneficiaries of the world tight oil boom are the US and her allies and the developing countries with no decent investment into other sources of energy. As global oil prices and OSH share price decrease, the transport industries of these countries will benefit from the low oil prices as the cost of transportation drops. An increase in jobs and research are also a welcome gain.
Uncertainties on the reliability of the technology of fracking cannot be assumed. Some risks come with the shale boom. Companies that will take a back foot on implementing it risk going under. An unfortunate accident or unethical mining are likely to cause a significant political and social uproar.
The bottom-line is that the benefits of this method are not a straight one-off that can be localized and put into a GDP and budget. If the recent trend in the energy sector is to go by, then we haven’t seen the best/worst of the American shale.