Oil price developments over the past 40 years have been truly spectacular.
In constant money, prices rose by almost 900% between 1970-72 and 2011-13 (Figure 1). This can be compared with a 68% real increase for a metals and minerals price index, comprising a commodity group which like oil belongs to the exhaustible category.
In our view, a number of political rather than economic forces have shaped the inadequate growth of upstream oil production capacity, the dominant factor behind the long run upward price push. But we believe the period of excessively high oil prices has now come to an end.
Beginning less than ten years ago, the shale oil revolution has turned the long run declining oil production trends in the US into rises of 73% between 2008 and 2014 (Figure 2). A series of environmental problems related to shale exploitation have been identified, most of which are likely to be successfully handled as the infant, “wild west” industry matures and as environmental regulation is introduced and sharpened.
An exceedingly high rate of productivity improvements in this relatively new industry promises to strengthen the competitiveness of shale output even further.
Geologically, the US does not stand out in terms of shale resources. A very incomplete global mapping suggests a US shale oil share of no more than 17% of a huge geological wealth widely geographically spread. Given the mainly non-proprietary shale technology and the many advantages accruing to the producing nations, it is inevitable that the revolution will spread beyond the US.
Using simple and reasonable methodologies, we estimate that the shale revolution outside the US will yield an additional 20 million barrels per day (mbd) by 2035 – nearly equal to the rise in global oil production over the past 20 years.
Another related revolution is beginning to see the light of the day. It is being realized that advancements in horizontal drilling and fracking, normally considered shale technologies, can also be applied to conventional oil extraction. This will yield a further addition of conventional oil amounting to 20 mbd by 2035.
The oil output increases are bound to have a strong price-depressing impact. Our optimistic scenario sees a price of $40 per barrel by 2035.
The global spread of the revolutions and the ensuing price weakness that we envisage for the coming two decades will, on balance, provide a great advantage both to the oil industry and to the world economy at large.
Not surprisingly, there will be important negative repercussions on public income from oil in producing nations. Juxtaposed against this conclusion is our supposition that the effects of the resource curse will be ameliorated as prices decline.
The two revolutions will apparently cement and prolong the global fossil fuel dependence, with implications for climate policy. The efforts to develop renewables for the purpose of climate stabilization will become more costly, requiring greater subsidies, in consequence of lower fossil prices.
The abundance caused by the revolutions will lead to hard to fathom changes in international political relations. We assert that much of the oil importers’ urge for political intervention and control will dissipate as the criticality of access becomes less urgent. For instance, the heavy diplomatic and military presence of the US in the Middle East is likely to be questioned when the country’s dependence on oil from the region is further reduced.