Shale boom calmed oil markets, but for how much longer?
Supply worries return: As bonanza nears limits, the world is thirstier than ever for crude
WASHINGTON—For the past decade, enough oil has flowed from America’s shale boom to allay worries that demand for the world’s most important commodity would outstrip supply.
Now, new volatility in global oil prices — which are up 15 per cent since the start of the year — signals that the calming effect of the shale bonanza is reaching its limits.
For perspective on shale’s impact, rewind to 2007, when some industry leaders saw world demand hitting a wall once it rose to 100 million barrels a day — a level they thought supplies would have trouble matching.
“Where is all that going to come from?” said James Mulva, the former chief executive of ConocoPhillips, that year, when the world produced and consumed about 85 million barrels a day.
In August, global oil demand reached 100 million barrels a day, and the world hardly noticed. What happened? Shale.
Using techniques such as hydraulic fracturing and horizontal drilling, U.S. oil drillers figured out how to get crude oil from ultradense shale rocks in North Dakota, Texas and Oklahoma. U.S. oil output rose from 5 million barrels a day in 2007, when Mr. Mulva raised his concerns, to a record of nearly 11 million a day in August, a remarkable increase that has rarely been replicated anywhere in the history of oil.
While this has helped the world meet rising demand for years, it cannot go on forever. Signs are mounting that shale won’t keep growing at the same rate in the U.S. Drillers face pipeline bottlenecks moving crude out of West Texas. This week, Halliburton Co. Chief Executive Jeff Miller said its oil-producing clients were facing “budget exhaustion” and he expected some to take extended breaks from drilling new shale wells. That is coinciding with warnings of plateauing, or even declining, production elsewhere in the world.
All the while, global economic growth has been strong for several quarters and oil demand continues to grow. Since its last yearover-year decline at the end of 2011, oil demand has grown annually by 1.5 million barrels a day, according to International Energy Agency data. The steady upward march of oil demand has left oil markets prone to price swings and spikes. The price of a barrel of Brent crude, the leading global benchmark, is up to near $77 a barrel, from $67 at the beginning of the year.
If U.S. production fails to grow at recent rates, it is far from clear that the world’s two other oil superpowers, Russia and Saudi Arabia, can pick up the slack. Russia is already pumping 10.8 million barrels a day of crude, a level unseen since the Soviet Union. Saudi Arabia, currently at 10.4 million barrels a day, is headed toward record-level output.
“The Saudis are just about out of spare capacity,” said Robert McNally, a former energy adviser to President George W. Bush who heads the Rapidan Energy Group, a Washington consulting firm.
Saudi Energy Minister Khalid al-Falih said this week, according to Russian news agency TASS, that the country would bump up its production to 11 million barrels a day to cool off the oil market, although some oil observers wonder if the kingdom would be able to fulfil this promise.
Meanwhile, exports from two other key oil-producing nations are falling.
In the midst of an economic meltdown under President Nicolás Maduro, Venezuela, the country with the world’s largest oil reserves, has seen its production fall to 1.2 million barrels a day today from 3.2 million barrels in 2006, according to the Organization of the Petroleum Exporting Countries.
U.S. sanctions on Iran’s oil sector are set to take effect Nov. 4, barring companies from buying Iranian exports. Oil traders are still assessing how effective those sanctions will be at crimping Iran’s oil industry, but analysts say they could remove anywhere from 1 million to 1.5 million barrels a day from global oil markets.
“This is the year geopolitics came back to the oil markets, and it is back with a vengeance,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. In recent weeks, the oil market has carefully watched growing strains in the U.S.-Saudi relationship over the killing of Saudi journalist Jamal Khashoggi.
The impact of Iranian sanctions or Venezuela’s falling output would have been muted a couple of years ago, when supply was plentiful. The rising demand means this is no longer the case.
“Geopolitics matter more when markets are tight,” said Sarah O. Ladislaw, director of the energy and national security program at the Center for Strategic and International Studies.
There are so far no signs of any actual supply squeeze and some believe that without the current geopolitical uncertainties, oil prices would still be stable. “Based on market fundamentals, there is absolutely no reason oil prices should be at this level,” said Ali Moshiri, chairman of Amos Global Energy LLC, a Houston-based oil producer and a longtime Chevron Corp. executive.
But if oil demand continues to rise — and Iranian exports are curtailed — prices could rise dramatically. A couple of years ago, such a rise might have been short-lived as shale producers accelerated operations and added more oil to the global market.
Geopolitical shifts also make for uncertain longer-term forecasts and price swings. While the U.S. hardline approach to Iran could lead to a rise in oil prices now, down the line the trade policies could erode oil demand and lead to future price drops.
For the U.S. to pursue both Iran sanctions and toughening trade policy at the same time “is a really big risk,” said Philip Verleger, an energy economist. “If we’re not careful, we could have a repeat of 2008 when oil prices started at $90 a barrel, went up to $140 and ended around $30,” he said.
For years, shale helped keep enough spare capacity in global markets that volatility began to feel like a relic of the past. In the years to come, the world may no longer have that shale shock absorber, ending a relatively peaceful decade in oil markets.