Daniel Yergin: US shale boom shaking up the global energy order

TOKYO Oil prices remain stuck at low levels, unaffected by the waves of risk washing over the world amid mounting geopolitical tension. What is driving that trend, and how long will it last? The Nikkei Asian Review put these and other questions to Daniel Yergin, vice chairman of research company IHS and a world-renowned expert on oil prices.

Why are oil prices so low? There are two continuing puzzles about the price collapse. First, the 50% fall in prices has not been the global economic stimulus that might have been expected.

The second puzzle concerns geopolitics. The oil market is usually very sensitive to geopolitics. Geopolitical risk is high now: The Middle East is in crisis. Relations with Russia are tense and the standoff in Syria makes things even more dangerous. Meanwhile, tensions are rising in the South China Sea. Yet none of that has caused a spike in the oil price.

The reason is that none of these have yet directly threatened the flow of oil. To put it simply, while there is a surplus of geopolitical risk, the surplus of oil is much greater, at least for now.

But we do need to remember that a geopolitical crisis or a more direct threat to the flow of oil could unexpectedly intervene in the market and send prices up again.

Is shale behind the surplus? The fall in oil prices is because of the shale revolution and the dramatic increase in U.S. oil production. Little more than half a decade ago, the “peak oil” thesis was pervasive — that the world was going to run out of oil and natural gas. How the world has changed! A few months from now, the United States will begin to export liquefied natural gas and may begin to export crude oil.

Between 2008 and April 2015, U.S. oil output increased by 4.7 million barrels per day, which was almost a doubling. The increase alone was greater than the output of each of the OPEC countries except for Saudi Arabia. The International Energy Agency made the startling prediction that the U.S. would within a few years overtake Saudi Arabia and Russia as the world’s No. 1 oil producer.

On top of that, Saudi Arabia and the Gulf countries made their own historic decision last November not to cut production in order to maintain share.

It was expected that prices would fall, but the further surprise was that prices fell much more than had been anticipated. The reason is that many underestimated the resilience of the U.S. shale revolution. This revolution is still unfolding, with continuing innovation and improvements in productivity.

IHS’ Performance Evaluator allows us to examine the characteristics of every oil well in the United States. One of the key things we have learned is the wide variability in shale oil wells. Some are big producers; some are marginal producers. In 2014, we discovered, just 30% of the new wells were responsible for 80% of the new production. In other words, there is great room to be more efficient. We expect that, by the end of this year, every dollar of spending on new wells will be 65% more efficient than was the case in 2014.

Meanwhile, when sanctions on Iran are lifted as a result of the nuclear deal, Iranian oil exports will probably increase next spring. The Iranians have made clear that they want their market back, and that they want it back as quickly as possible. The 400,000 to 600,000 barrels a day that are expected to enter the market would mean continued weakness for oil prices, at least in the first part of 2016.

Global demand for oil is softening. The fall in oil prices heralds a momentous shift in world energy markets from the BRIC (Brazil, Russia, India and China) era — the era of emerging markets — to the shale era.

During the past 10 years, China’s gross domestic product increased two and a half times and India’s doubled. During the same time, the U.S. economy grew by 16%, the European Union by 10% and Japan just 6%. It was a rebalancing of the world economy.

The rapid growth of the emerging markets generated what became known as the “commodity supercycle.” China’s enormous appetite for commodities drove commodity prices up. Between 2003 and 2013, China consumed 45% of all of the growth in global demand for oil. It seemed that demand would only grow, and prices would only increase, whether you were talking about iron ore, copper or oil.

It turned out that many economies did not understand how dependent they were on China, and what it would mean for them if commodity prices went down.

But cycles don’t go on forever. IHS’ nonenergy Materials Price Index reached its peak in April 2011 and then began to decline. Since July 2014, that decline has turned into a rout, with the index falling 45%.

With China’s slowdown, do you see India serving as a new engine of growth? The Indian economy has a different kind of balance to it. China had these huge commodity needs because of the migration to the cities. We are not going to see that kind of growth in India and thus India will not be importing huge amounts of commodities like China did.

Cheaper oil has not provided a stimulus to the world economy. That gets to the basic question: Does the end of the commodity supercycle point to deeper problems in the world economy? It is not just the question of China’s economy. Rather it is the nexus of a slowing China and emerging market countries that have been so tied to Chinese growth. The signs are evident not only in lower commodity prices but the fall in currencies, capital flight and high levels of emerging market debt.

If the U.S. becomes the world’s largest oil producer, what would that mean for the country in strategic and geopolitical terms? Before shale, you saw more and more mega oil projects worth 10, 20, 30 billion dollars that would take 15 to 20 years to develop. Now, you have shale projects where you can make a decision and dig a well in 120 days. It is no longer $10 billion projects, but $10 million projects. U.S. production can go up or down so quickly in response to price, and that makes the U.S. the swing producer.

The U.S. is going to play a very important role as an oil producer, which was not really imagined five or six years ago. It clearly strengthens the economic position of the U.S., and it adds a new dimension to U.S. influence in the world.

But there is also the question of “why is it just the U.S.?” Other regions, too, have potential for shale oil.

Nikkei