The Shale Shock: How the World has Changed

The Heartland Institute reports:

We are witnessing a modern energy miracle. For more than 30 years, U.S. crude oil production fell from 9.6 million barrels per day in 1970 to 5 million barrels per day in 2008. Oil production, an annual $200 billion industry, was in long-term decline. Industry experts proclaimed that we had reached “peak oil” and that world oil output would soon fall. But beginning in 2008, U.S. production soared, again reaching 9.6 million barrels in June of this year, recovering all of a 30-year decline in just seven short years.

For more than a century, geologists searched for pockets of oil and gas between rock layers. But by using the technological advances of hydraulic fracturing, or fracking, and horizontal drilling, geologists learned how to squeeze oil and gas out of the rock itself. Shale is a common rock formation that covers large areas in the U.S. and other nations. In a 2013 study, the Energy Information Administration concluded, “the world shale oil and shale gas resource is vast.” The shale revolution has opened additional centuries of low-cost hydrocarbon resources to modern society.

On the world stage, the most obvious shale shock impact is the precipitous drop in world oil price. The price of a barrel of West Texas crude dropped from $106 in July 2014 to $53 in January of this year. Prices have now fallen to under $45 per barrel, a level not seen since 2009. Our current $2.50 price for a gallon of gasoline is a direct result.

For the first time in four decades, the world market price for petroleum is determined by competition. The Organization of Petroleum Exporting Countries (OPEC) can no longer dictate the price of crude oil by restricting production. Small firms that led the shale revolution, such as Baker Hughes, Cabot Oil & Gas, and Range Resources, now have the ability to quickly ramp or reduce production from shale fields, depending on market price. Big oil firms like ExxonMobil and BP are reacting to the shale shock along with everyone else.

It appears that low oil prices are the new normal. In the shale fields, oil production per drilling rig has increased 500 percent in the last seven years. Energy expert Mark Mills of the Manhattan Institute estimates that the fracker cost will soon drop to $20 per barrel, on par with the low-cost oil fields of Saudi Arabia.

Peak oil?