Increasing U. S. Unconventional Oil Output Could Lead to Pricing Pressure

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Below are the key findings of a new study based on a field-by-field review of the oil formations and exploration projects around the world conducted by Leonardo Maugeri, a Harvard researcher and a former Eni SpA executive.  This bottoms-up approach is different than many macroeconomic analyses commonly seen and provides a compelling viewpoint.

-Oil is not in short supply.  From a purely physical point of view, there are huge volumes of conventional and unconventional oil still to be developed, with no “peak-oil” in sight.  The full development of the world’s oil potential depends only on price, technology, and political factors.  More than 80 percent of the additional production under development globally appears to be profitable with a price of oil higher than $70 per barrel.

-Other things being equal, any significant setback to additional production in Iraq, the United States, and Canada would have a negative impact on the global oil market, given their potential for new production by the year 2020.  However, also a significant setback of traditional big producers such as Saudi Arabia or Russia could have the same effect, proving once again that the oil market is global and none of its pieces (e.g. countries) can be insulated from the others.

-The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades.  It will probably trigger worldwide emulation, although the U.S. oil boom is difficult to be replicated given the unique features of the U.S. oil (and gas) arena.  Whatever the timing, emulation over the next decades might bear surprising results, given the fact that most shale/tight oil resources in the world are still unknown and untapped.  China appears to be the first country to follow the U.S. example.  Moreover, the extension of horizontal drilling and hydraulic fracturing combined to the conventional oil fields might dramatically increase the world’s oil production and revive mature, declining oilfields.

-In aggregate, conventional oil production is also growing throughout the world, although some areas (the North Sea), face an apparently irreversible decline of the production capacity.  In most traditional producing countries, old oilfields go through a production revival thanks to better techniques and knowledge, or advanced exploration and production technologies, so far used only in the U.S. and the North Sea.  Huge parts of the world are still relatively unexplored for conventional oil (for example, the Arctic Sea and most of sub-Saharan Africa).

-The age of “cheap oil” is probably behind us, but it is still uncertain what the future level of oil prices might be.  Technology might turn today’s expensive oil into tomorrow’s cheap oil.

-The oil market will remain highly volatile until 2015 and prone to extreme movements in opposite directions, thus representing a major challenge to financial investors, in spite of its long term and short term opportunities.  After 2015, however, most of the projects considered in this paper will advance significantly and contribute to a strong build up of the world’s production capacity.  This could provoke a major phenomenon of overproduction and lead to a significant, stable dip in oil prices, unless oil demand were to grow at a sustained yearly rate of at least 1.6 percent for the entire decade.

-A revolution in environmental and curb-emissions technologies is required to sustain the development of most unconventional oils, along with a strong enforcement of already existing standards, rather than massive over-regulation.  Without such a revolution, a continuous dispute between the industry and environmental groups will force government to delay the development of new projects.

-If the revolution I have described in the paper achieves its maximum potential, it will have major geopolitical consequences.

-In particular, it will make Asia the reference market for the bulk of Middle Eastern oil, and China a new protagonist in the political affairs of the region.

-At the same time, the Western Hemisphere could return to a pre-World War II status of oil self –sufficiency, and the United States could dramatically reduce its oil import needs.  However, this will neither insulate the country from the rest of the global oil market, nor diminish the critical importance of the Middle East to its foreign policy.

-The unconventional oil revolution in the U.S. and the Western Hemisphere must not obscure the fact that through 2020 and beyond, more than 50 percent of the global oil supply will continue to come from a geographic arc stretching from Russia to the Persian Gulf.  Every major event concerning this geographic arc will be critical to the overall stability of the global oil market.

It’s also true, however, that over the next decades, the growing role of unconventional oils will make the Western Hemisphere the new center of gravity for oil exploration and production.

To read the entire study, click on the attached link:  https://belfercenter.ksg.harvard.edu/publication/22144/oil.htm

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