A technological breakthrough has made shale gas production profitable and transformed the US gas market. At today’s production level the total gas reserves of the US are now large enough to cover consumption for the next ten years. The same technique can be used to extract oil from shale, so we could therefore be facing a paradigm shift also in the oil market.
Ever since the oil crisis in 1973, the US has had an ambition to become self-sufficient in oil again. New extraction methods and high oil prices have made production of oil from shale formations lucrative. There is still little available information on the overall size of extractable oil reserves. According to the United States Geological Survey, the extractable shale oil reserves of the US could be more than 24 Bbo. The US is assumed to have about half of the world’s known reserves. Shale oil production is expected to increase six-fold over the coming ten years from the current level of around 400,000 bopd. Together with increased NGL production (natural gas liquids) and larger extraction from existing fields, shale oil could take the US one step closer to oil self-sufficiency.
Until the early 1970s the US rather than the Arab countries was seen as the oil industry’s last resort. Oil producers in Texas, Louisiana and Oklahoma could always swiftly turn on the taps and transport more oil to the global market if the need arose. But US oil production peaked as early as 1970 and has since fallen by over 30%. During the same period overall oil consumption rose by a hefty 41%. This has made the US very dependent on oil imports from politically unstable countries such as Nigeria, Venezuela and Iraq. The growing dependency of the US on imported oil has made the country more economically and politically vulnerable. Oil-exporting countries have on a number of occasions used oil to exert political power. The last time that the oil weapon was used was during the oil crisis in 1973. The US no longer had an oil buffer for the West to lean on and was thus unable to defend itself against OPEC’s oil supply cut. Since then, Venezuela’s Hugo Chavez has several times threatened to cut oil supplies to the US. The president of Iran has threatened to use the oil weapon if the US and the West step up the pressure to stop the country’s uranium enrichment program. The sharp rise in oil prices in recent years has therefore been a growing worry for the president. In value terms oil makes up around 20% of the country’s imports of goods and more than half of the US trade deficit. Increased shale oil production, stricter energy efficiency requirements, notably in the transport sector, and increased usage of biofuels could slash the oil imports bill and significantly improve the US trade balance versus other countries.
Shale oil production also offers major environmental challenges. There is growing concern that the manufacturing process may pollute the ground water, and the US authorities are considering limiting drilling activity near water reservoirs. Stricter environmental requirements could put a major damper on the extraction of shale gas and oil.
