They’re not worried. That’s what the leaders of the Organisation of Petroleum Exporting Countries (OPEC) are saying about the increasing discovery of shale oil. They’re not worried. But those on the ground know it is a different story. The air is rife with tension, panic and confusion in the world’s 8th largest oil exporter and Africa’s largest oil producer – Nigeria. The president is urging his citizens to stop obsessing over oil-money and start concentrating on diversifying the economy. They knew that their over dependence on oil would one day come back to haunt them, but somehow nobody took it seriously, until now.
With the US discovering and utilising more shale fuel, countries like Nigeria (OPEC member since 1971) that have been big exporters to the country are beginning to fear for their safety. Nigeria exported 33% of its oil to US in 2011, but that figure has been drastically reducing since then and is set to see a further decline thanks to shale oil production. This is unwelcome news to many oil producing states, but it appears to be great news for the rest of the world. It is believed that these discoveries will reduce OPEC’s dominance on the oil market, which could also mean a reduction in fuel costs, or at least so the figures tell us. OPEC’s crude oil reserves in 2011 were 1,200 billion barrels, which amounts to 81% of the total world crude oil reserves. OPEC produces 40% of the world’s crude oil and its exports account for 60% of the total petroleum traded globally.
The price of oil has been largely determined by OPEC, which aims to maintain it around $100 per barrel – roughly double what it was in 2005. While the 12 members of OPEC smiled to the bank, other countries had to deal with rising costs of transportation, manufacturing and oil based goods, forcing living costs in general to new highs the world over. The direct and indirect impact this has had on the global economy cannot be quantified, but it has undoubtedly been a huge burden. But given the latest developments, OPEC expects a decline in demand for its oil next year of 250,000 barrels a day, which seems small, compared to the daily demand it expects of 29.61 million barrels. If shale oil exploration in the US is as promising as they claim then it is likely the demand for OPEC oil will continue to decline in the years to come and so should the price of oil.
The US Energy Information Agency (EIA) estimates total US shale resources of 33 billion barrels in 2010, a revision of its 4 billion barrels estimate in 2007. US shale production has seen a roughly 26% increase per year between 2004 and 2011 – from 111,000 barrels per day to 553,000 barrels per day. It is unlikely that this trend will continue at this pace, but even at current levels, this is very good news for the oil market. EIA predicts that shale production will rise at a much slower rate, to around 1.2 million bpd in 2035. Other analysts think this is too conservative and put the figure around 3-4 million barrels per day.
However the US isn’t the only country with shale resources, but they are the only ones producing it at a high level. Global shale resources could be anywhere between 330 billion barrels and 1,465 billion barrels (the figure will become clearer as countries ramp up explorations). Argentina, Russia, China, New Zealand and Australia are beginning to carry out more research into their shale oil resources and exploration methods. Columbia, Mexico and Japan are other countries also trying to advance their shale exploration and production. In January of this year, an Australian firm announced the discovery of 233 billion barrels of shale oil resources in the country. It is worth noting that none of these countries mentioned are members of OPEC. If these countries were able to start producing shale oil on the same scale as the US that would undoubtedly end the dominance of OPEC. But unfortunately this is not the case, yet.
The International Energy Agency (IEA) forecasts a 19% rise in global oil production over the next 20 years, due to rising demand in emerging markets, with China leading the way. The EIA expects the increase to be 28%. The price of oil over that period is to reach about $130 per barrel. However these estimates minimise the impact shale oil will have on the market. They base their predictions on the state of shale oil production as it is today, therefore assuming there will be no significant breakthroughs in countries outside of US for the next 20 years. Given the investments these countries are making into shale oil exploration, this assumption is underwhelming at best. The US currently has 20% of the world’s shale oil reserves and 80%
PwC have done their own analysis and expect that global shale oil production could be as high as 14 million barrels per day by 2035, which would be 12% of total oil supply. They estimate that this could reduce the price of oil at the time by 25% or even 40%, should OPEC not attempt to adjust the market price by reducing their own supply. So instead of the price estimate of $127 by IEA or the $133 by EIA, the price could be $100 per barrel or even $83 per barrel in real terms. They estimate that this could increase global GDP at the time by 2.3% or 3.7% (around $2 trillion). This could mean an increase in GDP per person of between $230 and $370 per annum at today’s prices.
#Talking Point – The shale oil market is still young and therefore provides prime investment opportunities in many countries around the world. Russia is enticing investors by promising a zero extraction tax for most of its shale reserves. Chinese oil companies are seeking foreign investors to collaborate with and Australia seems to be making serious headway. Shale oil production is bound to increase, which could see a reduced demand for lower carbon transport fuels. The implications for oil companies and alternative fuels companies are huge and need to be properly evaluated. It is unlikely that OPEC will lose all their power in the next 20 years, but till then a reduction in oil prices would be a good start for the world.