BP group chief economist Spencer Dale has been explaining how the ‘shale revolution’ and concerns over climate change have changed the economics of the oil industry for good at a conference in London.
In his speech, ‘New Economics of Oil’, he said that shale has changed the principles needed to understand the market because of factors such as shorter lead times, greater exposure to financial markets and its use of manufacturing-like processes.
Dale argues that the pace at which oil reserves are increasing, coupled with concerns over climate change, mean that the world’s reserves of oil are likely to never be exhausted – challenging the conventional view that crude oil prices will rise with increasing scarcity.
He said: “The oil market has changed very significantly over the last 10 or 15 years. The principles and beliefs that served us well in the past are no longer as useful for analysing the oil market. We need an updated set of principles reflecting the New Economics of Oil.
“Just like we wouldn’t take a monkey wrench and an oily rag to the digital engines found in today’s cars, likewise, we need to update our analytical tools to take account of today’s oil market.”
Two changes in particular have had a profound impact on the economics of the oil market.
The most significant change stems from the US shale revolution: the rapid growth of on-shore oil production in the US, typically using hydraulic fracturing (or fracking) techniques to extract oil from shale and other types of so-called ‘tight’ rocks.
The second major change is occurring more slowly and arises from the increasing concerns about carbon emissions and climate change.Dale added:
“Although US shale oil accounts for less than 5% of the global oil market, the rapid growth in US shale oil was the key factor driving the collapse in oil prices last year: US oil production on its own increased by almost twice the expansion in global oil demand.
“Moreover, the different production techniques and financing structures found in the US shale industry have the potential to have a lasting impact on global oil market dynamics.”
From a near standing start in 2010, US shale oil production has increased to around 4.5 Mb/d today.
The poster child for these advancements in recent years has been the US shale industry. The use of increasingly sophisticated drilling techniques and huge improvements in cost efficiencies has allowed previously uneconomic resources of oil to be recovered. Productivity gains within the US shale industry in recent years have been ‘mind-boggling’ said Dale