By Deborah Lawrence Rogers
Much rhetoric about energy independence has been bandied about from policy makers in Washington and executives in the oil and gas industry. We are assured that energy independence is possible now thanks to the large shale deposits being exploited throughout the country. The sound bites are frequent and effective. But when one looks more closely at the numbers, it becomes patently apparent that industry claims border on hyperbole.
The story goes that we have been engaged in a “shale revolution” since about 2005 when gas drilling in north central Texas’ Barnett Shale first emerged with significance. By 2009, nearly five years ago, we entered into the tight oil revolution (from shales) with production spiking from the Bakken formation in North Dakota and the Eagle Ford in south Texas. Industry apologists began speaking of the U.S. as having the potential to become “two Saudi Arabia’s”. Of note, however, is what industry executives and apologists were not mentioning: per well production peaked in both the Bakken and the Eagle Ford as far back as June of 2010. We know this from production records filed with state regulatory entities. That’s right. A frenzy of drilling which has more than doubled the number of wells in each formation since 2010 has masked the fact that operators have not been able to increase per well production beyond the levels seen a full three years ago. Another example of the drilling treadmill which can only hide flaws for so long.
But the merits of shale production can and should also be examined by looking at crude and gasoline prices. After all, the shale revolution is propounded to be carrying the U.S. toward energy independence. But is this really the case?
If true, then the added production from tight oil plays should be causing crude prices to decline for U.S. consumers which would then effect a concomitant decline in the price of gasoline. But this hasn’t happened. And for a very good reason. The shale energy “revolution” is simply not large enough to make a significant impact in global supply terms.
While the U.S. domestic production of crude has spiked approximately 34% since 2009, this surge has had minimal impact on global markets because it is almost imperceptible when added to global supplies. Hence the need for hyperbole.
Energy is a global commodity and as such it is traded in global markets where U.S. tight oil flows into the global crude mix. Industry hype would like us to forget this inconvenient truth.
So how much impact has U.S. tight oil had on the global energy mix? Negligible. The “shale revolution” has added about 1.5% to total global crude supplies. Further, this figure is unlikely to change dramatically given that almost all U.S. crude is being produced from only two plays, the Bakken and the Eagle Ford, both of which have already experienced per well declines as discussed above. Without additional significant new finds, the U.S. contribution to global energy supply is limited at best.
An addition of 1.5% to total global supplies does not lower prices of crude and thereby gasoline regardless of political posturing and endless sound bites. In short, the crude markets have been unmoved by the U.S. “shale revolution”. In fact, the average price of both crude and gasoline in the U.S. has fluctuated wildly during the corresponding time period and is, unfortunately, another indication that price stability is not occurring thanks to tight oil. Gasoline prices too have risen during the same time period placing further inflationary pressures on U.S. consumers.
That is neither energy independence nor energy security.
Further, the new crude which is being produced from shales is expensive and difficult to extract thereby driving up the costs considerably as compared to crude produced from more conventional wells. Producers need a crude price of about $100/bbl to make tight oil economic and a bit profitable. If prices decline, production will be priced out and if prices rise, consumers will be priced out.
But perhaps what is most interesting of all is what the industry actually has to offer U.S. consumers: a considerably more expensive version of the same old widget. An effective widget but not a new and improved widget. Industry is not offering an improved version of an old product. In fact, it can reasonably be argued that they are offering an inferior version of an old product in that the environmental costs of tight oil are proving fairly significant together with the costs of damages due to climate change.
This could go far in explaining why industry has engaged the services of public relation firms, indeed, even hiring PR executives and bringing them in house. The hyperbole over shales has reached fever pitch. After all, convincing people to pay considerably more for a product that is neither new nor improved but still extracts considerable damage to the local environment requires considerable Madison Avenue talent.
And yet what’s an industry to do when it has an environmentally unfriendly production model, a finite supply and a product which is known to be the primary culprit behind devastating climate change: hire a good PR firm, of course!
Deborah Rogers, Energy Policy Forum, 26 Dec 2013
Printed with permission by the author.