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The Price of Oil, by Roberto Aguilera and Marian Radetzki – Part 2

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World Pipelines,

The following is Part 2 of chapter-by-chapter summary press release covering The Price of Oil, by Roberto Aguilera and Marian Radetzki. Read Part 1 here.

Part: The shale and conventional oil revolutions cont.

Another related revolution is beginning to see the light of the day, but news about it has barely reached the media. It is being gradually realised that the advancements in horizontal drilling and fracking can also be applied to traditional oil extraction, thereby substantially improving the productivity of conventional, mature and declining oilfields worldwide. This is yet another method to achieve enhanced recovery, in addition to the usual enhanced oil recovery technologies involving the injection of steam, chemicals or gas into formations. Several basins in the US and other countries are already experiencing this new phenomenon, which Aguilera and Radetzki call the conventional oil revolution.

In a similar fashion to the output projections for shale oil, Aguilera and Radetzki assume that conventional oil in the rest of the world is able to benefit from the application of shale oil extraction methods just as US conventional oil did. Since 2008, the shale technologies have led to a US conventional oil rise of around 0.5 million bpd. Imagine now that the ROW is correspondingly successful by 2035 in applying the related technologies to its share of conventional oil reserves as the US has been until now. This would yield a further addition of conventional oil amounting to 19.7 million bpd by 2035 (Table 2).

Table 2: Speculative ROW conventional oil rise by 2035 from spread of shale extraction methods, million bpd
Global 2014 oil output Global rise, 20 years (1994 - 2014) US share of oil reserves, BP (annual) US conventional oil production rise, 8 years (2008 - 2016) ROW conventional oil production rise, 20 years (2015 - 2035)
88.7 21.6 2.6% 0.5 19.7

The combination of the two revolutions sum up to a spectacular total output rise of 39 million bpd. This equals almost half of global oil output in 2014, is nearly twice as much as the global increase in all oil production in the 20-year period 1994–2014, and is close to one-third greater than OPEC’s output in 2014.

The pace of the shale and conventional oil revolutions is likely to be slowed somewhat if the price levels observed in the first half of 2015, averaging some US$57 per bbl (Brent spot), persevere for several years, and the ultimate price fall caused by the revolutions will be less dramatic. In a five year time perspective, Aguilera and Radetzki believe there is a likelihood that prices will recover a bit from the 2015 quotes, pending the shale revolution’s international spread. However that will be, it is Aguilera and Radetzki’s view that the major long-term conclusions from their analysis remain unaltered even with oil prices persevering for many years at the 2015 levels. The main reasons are that shale oil is likely to remain broadly economic at those lower market prices, and that many producers will thrive in a low price environment as they are incentivised to slash costs and increase operational efficiencies.

Aguilera and Radetzki firmly believe that the combined impact of the two revolutions will have an overwhelming impact on oil, by far the economically most important primary commodity in human use. The oil output increases alluded to above are bound to have a strong price-depressing impact, either by preventing price rises from the 1H15 levels, or by pushing them back to these levels if an early upward reaction takes place. Aguilera and Radetzki’s reference case conclusion on prices envisages a level of about US$60 in 2035, while a more optimistic scenario which appears increasingly likely, sees a price of US$40 by then. The price implications of the revolutions will in turn influence many other conditions that shape human life, be they economic, political, diplomatic or military. This, however, is the subject of the book’s third part.

Part: Global implications for the macroeconomy, the environment and for politics

The global spread of the revolutions and the ensuing price weakness that Aguilera and Radetzki 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. Successful shale and conventional oil developers could reap benefits similar to those bestowed on the US in its progress in recent years.

Not surprisingly, there would be important negative repercussions on public income from oil in producing/exporting nations that fail to compensate for the effects of the oil price decline by expanding output with the help of the revolutions. Juxtaposed against this conclusion is Aguilera and Radetzki’s 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. At the same time, the expansion and cheapening of natural gas in consequence of the revolutions will make it possible to shrink coal use in power production, thereby reducing CO2 emissions, as is already evident from the US experience since some years. The efforts to develop renewables for the purpose of climate stabilization, however, 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. Aguilera and Radetzki assert that much of the oil importers’ urge for political intervention and control will dissipate as the criticality of access becomes less urgent with normalization of profit levels and more ample and diversified oil availability. For instance, the heavy diplomatic and military presence of the United States in the Middle East is likely to be questioned when the country’s dependence on oil from the region is reduced. The growth and geographical diversification of supply would not only suppress prices, but would also promote competition among suppliers and make it more difficult for producers to influence the market to their advantage or for their governments to use energy sales in pursuit of political ends.

There is no doubt that successful shale and conventional revolutions will bring about exciting changes in many fields. The Price of Oil aims to explain what they are and where they will occur. However preliminary, Aguilera and Radetzki believe their findings will be highly useful as a starting point for discussions and analyses to follow in many coming years.

The Price of Oil, by Roberto Aguilera and Marian Radetzki, is to be published by Cambridge University Press in November 2015.

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