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How Far Will the Shale Boom Go?

How Far Will the Shale Boom Go? thumbnail

The shale energy revolution has already upset the “peak oil” forecast, which predicted that the world will soon reach the point of highest physical oil output and thereafter global production will begin an inexorable decline. Now, in the context of the worsening political situation in the Middle East and Eastern Europe, its impact is being discussed in terms of America’s ability to secure its own energy supplies and assist its allies with theirs. The near-term enthusiasm for shale energy is understandable, but what are its longer term prospects?

Energy markets are notoriously difficult to predict. In the 1970s, as U.S. oil production reached a historic high point and turmoil in the Middle East produced two spikes in crude prices, there was talk of imminent scarcity. While global output stood at around 60 million barrels per day (mbd), some analysts declared that the world would be just about out of oil by this time.

However, far from going straight up, oil prices actually fell throughout the 1980s and 1990s, and, without any major new sources of supply emerging, reached $10 per barrel. Since the start of the new century, however, prices have been driven by the rise of China and rapid economic growth in emerging economies. The number of cars plying roads around the world increased from 750 million in 2000 to 1.2 billion currently. This has been the main reason why oil production kept rising, and now stands at around 90 mbd, whereas oil prices jumped roughly tenfold.

By 2050 there may be up to 3 billion cars in the world, possibly requiring oil production to increase to 120–150 mbd.

Apparently we face an age of scarcity in which energy prices will go ever higher. Or do we? The shale revolution changed the dynamics of the energy market. U.S. oil production is now the highest it has been in 27 years, and there is enough domestic oil to meet 84% of US demand. By 2016, domestic output should set a new all-time high and some forecasts expect shale oil production to reach 5 mbd by 2017.

Other countries, including Mexico, China and Brazil, are exploring their shale deposits as well. There has been something of an oil glut developing around the world and oil prices, despite political concerns focused on such oil producers as Libya, Iraq, Iran and Russia, have been generally soft.

Adding to the softness of the oil market has been a complementary natural gas boom, also from shale. Over the past decade, gross natural gas withdrawals in the U.S. rose by a third, prices declined and demand for gas for home heating spiked, while heating oil demand plummeted. Shale gas accounts for about half of U.S. domestic natural gas production, up from a very small percentage a decade ago.

During the past decade, oil prices have been uncharacteristically volatile, suffering an 80% drop, peak to trough, during the 2008 financial crisis, then staging a three-year rally which saw crude prices quadruple. This indicates, above all, considerable uncertainty as to where prices will go. However, over the past two years volatility has moderated substantially, suggesting a kind of truce between supply and demand.

Which Way?

In other words, demand has been growing as predicted and supply has been increasing apace to achieve price equilibrium. Any change in expectations could lead to a precipitous drop to $60 per barrel (a bearish forecast) or a jump to $150 per barrel (a bullish view).

Oil bulls tend to be pessimistic about the prospects of shale energy. Their case is twofold. One is financial: Shale energy is costly to produce, so the current boom could only happen amid high oil prices and thus contains the seeds of its own destruction. There have been moments when natural gas prices fell so low that some wells stopped production. The same could happen to shale oil producers if the oil surfeit they engender brings down prices.

Besides, shale producers have used debt to fund their exploration and production, which has been both easy and cheap in a low interest rate environment. If economic growth accelerates, interest rates will rise, as well, hurting shale oil producers.

The other problem is technological. Fracking, the technique needed to break up shale rock to get to the oil and gas layers located in-between, is not especially friendly to the environment. It requires vast amounts of water, chemicals and sand to be pumped into wells. Residents have been up in arms in some densely settled areas, and their opposition will raise the cost of producing shale energy still higher while reducing the amount of recoverable oil and gas. In some countries, notably China and India, the shale boom may not even happen, at least in the near future, because of the scarcity of water in the areas where shale oil and gas deposits are located.

Finally—and most importantly—while yielding a lot at the start, shale oil and gas wells tend to be exhausted faster than conventional ones, which in some cases produce for decades. Shale gas wells, for example, typically halve their output after the first year of operation. Now that the most accessible and productive deposits have been worked, companies are forced to drill thousands of new wells every year just to keep up production. Producers may have to spend $35 billion annually on new drilling—much of it in borrowed funds. The government warns that all technically recoverable shale gas will be pumped out by 2030.

While oil bulls cast doubt on shale energy production, oil bears scrutinize the demand side. There is no question that demand for energy has exploded thanks to faster growth in emerging economies and the expansion of the global middle class. However, just as shale energy producers have relied on cheap, plentiful money, so the ongoing global economic boom owes much to worldwide monetary ease. An eventual tightening could send a number of countries into an economic downturn.

A self-correcting mechanism also exists in oil prices. True, many Chinese, Indians and Brazilians have been eager to get behind the wheel of a private car. But would they drive quite as much if oil prices rose to $150 per barrel? A number of poor countries provide fuel subsidies for their consumers, shielding them from the impact of still-high gasoline prices. However, fiscal retrenchment has now become global, and governments are being forced to cut or eliminate such subsidies to save money.

Transitional Period

The fracking boom is unlikely to be the panacea some of its supporters have been touting. There are considerable deposits of shale oil and gas around the world but there are plenty of reasons why it will be costly or technically difficult to tap them, and why some deposits may prove non-recoverable. More to the point, even a highly successful shale oil revolution will not disprove the peak oil theory: Eventually the world will run out of oil, no matter how many more unconventional reserves we discover.

But pessimists are also wrong. Shale energy has already had a substantial impact on energy markets, proving it is no flash in the pan. One reason it will continue to play a major role is that technology does not stand in place. Shale oil and gas will keep getting cheaper as technology develops and economies of scale are achieved, allowing producers to recover more oil and gas, and to do so more cleanly.

Technology is key. Since the advent of the IT revolution we have discovered that old style jobs in manufacturing and services simply don’t pay well and are being automated out of existence. What pays instead is innovation. The same is true of the production of natural resources. Even though commodity prices have been historically high, simply pumping commodities out of the ground is ultimately a race to the bottom. That’s because the innovative economy of today will inevitably discover cheaper ways to produce those commodities, or find substitutes for them and ways to use them less.

All of this will be happening in and around the shale energy industry. Liquefied natural gas has opened up overseas markets for U.S. shale gas. In a few years LNG will provide for energy security in Western Europe vis-à-vis Russia, currently its main natural gas provider.

Aside from cutting costs, improving recovery rates and making production safer for the environment, innovation will move in the direction of energy saving technologies and toward other forms of energy, including renewable energy. Ironically, investment in innovation will be spurred if oil prices stay near their current levels or temporarily move higher.

think advisor

26 Comments on "How Far Will the Shale Boom Go?"

  1. Plantagenet on Mon, 29th Sep 2014 12:59 pm 

    M. King Hubbert never dreamed that US oil production could reverse its decline and rise to the point that it would top the peak in the 1970s that he predicted.

    Who will be the new M. King Hubbert who will predict the new peak in US prediction, including shale, as well as the final global peak?

    When will we hit peak oil?

  2. Aire on Mon, 29th Sep 2014 1:26 pm 

    Everyone counts sweet crude oil and shale low grade oil as the same stuff. It’s not – so Hubbert’s prediction was pretty right. All these shale plays do is make the game last a bit longer.

  3. rockman on Mon, 29th Sep 2014 1:33 pm 

    There is so much wrong with the non-technical wording in the article it’s difficult to know where to begin.

    “More to the point, even a highly successful shale oil revolution will not disprove the peak oil theory: Eventually the world will run out of oil, no matter how many more unconventional reserves we discover.” Once again someone wants to change the meaning of PO. Such as it means the world will run out of oil.

    And as far as not being “a flash in the pan” how exactly would one define such a “flash in the pan”?

    Bottom line: the continuation of the US shale boom is contingent upon two primary factors: the price of oil and the physical limit of the particular shale trend. Pricing: no one knows for a fact where oil prices will be over, say, the next 10 years. Lots of predictions, projections, guesses etc. But no one KNOWS. Therefore no one knows how long the shale plays will see the high drilling rate we’ve witnessed. And thus no one KNOWS how much oil we will or won’t be producing in the future. No one predicted a surge in US oil production based upon $30/bbl oil. Likewise no one is predicting lots of the shale production with prices falling significantly.

    But let’s make a simplifying assumption: oil prices will remain high enough to justify drilling the shale trends. Which also requires that the oil patch has sufficient funds to do so. So how long will the shale boom continue? Easy answer: until all the potential locations are drilled. And that is finite. The Bakken, Eagle Ford et al formations don’t continue endlessly to circle the planet. They have rather well defined geographic limits. I’ve seen many folks estimate huge number of wells to be drilled in the various shale trends. But I’ve yet to see one person put an X on a map showing where each well would be drilled. What does it mean when the number of X’s on the map don’t match those future production projections? Another simple answer: it means those future production numbers don’t mean sh*t. LOL.

    Every hot play that has boomed since the beginning of oil/NG exploration in the world has reached their finite geographic limit. It doesn’t matter if oil reaches $500/bbl: no one is going to drill an EFS well in Burleson County, Texas. In fact, at that price the vast majority of Texas counties won’t see an EFS well drilled: the formation doesn’t exist under most of the 268,000 sq miles that the state covers.

    So the next time you see someone project X millions of bbl of future EFS production just ask them a simple question: what is the size of the area that those wells will be drilled. If that number exceeds the areal extent of the oil window of the EFS formation then you can be pretty sure their number isn’t worth a sh*t. LOL. And if they can’t provide the areal extent? IMHO you should stop wasting your time with them.

  4. Plantagenet on Mon, 29th Sep 2014 1:41 pm 


    Hubbert’s model that oil production will eventually peak is correct, but his predictions that US oil production would peak in 1970 and then go down and global oil production would peak ca. 2000 are clearly wrong.

    We need a new M. King Hubbert to predict when the actual peaks will occur, taking the new tight oil resources into account

  5. rockman on Mon, 29th Sep 2014 1:43 pm 

    Aire – More to the point: Hubbert specifically said his projection didn’t include yet to be developed plays. He was not predicting future production of the US. he was predicting the future production from those specific trends that made up his analysis. In that regards his projection has proven to be accurate.

    And to answer Plants request I’ll be more then glad to make that new projection. Just check back with me after the vast majority of the wells in these new trends have been drilled. That’s the same approach Hubbert used to make his projection. Good enough for him…good enough for me. LOL.

  6. Perk Earl on Mon, 29th Sep 2014 1:44 pm 

    “Now, in the context of the worsening political situation in the Middle East and Eastern Europe, its impact is being discussed in terms of America’s ability to secure its own energy supplies and assist its allies with theirs.”

    Oh, so now we are going to become energy independent and help our allies do the same?! “To the Moon, Alice!” Ralph Cramden.

  7. rockman on Mon, 29th Sep 2014 1:45 pm 

    Plant – Yep, I agree…he went a bridge too far projecting global oil production. But again he was basing that on known trends at the time.

  8. Plantagenet on Mon, 29th Sep 2014 1:49 pm 

    Hubberts famous prediction that US oil production would peak in 1970 is falsified if US production exceeds the 1970, as the US Government EIA is predicting will happen soon.

    If we exceed the 1970 peak, then when will the actual peak occur? 2017? 2020? When?

    Its a pretty important question. I’m surprised no one has crunched the numbers, including the new tight oil plays, and made a new prediction about when the peak is US oil production will occur.

    Rockman—here’s your chance to become famous!

  9. Pveroi on Mon, 29th Sep 2014 1:51 pm 

    I find the current peak oil narrative very frustrating in that it seems to be forgotten that shale oil and gas were known in the 70s. It’s not a revolution, it’s a worst case scenario. The only reason peak oil forecasts didn’t include it is because it was offline due to its inferior quality. Now we use it (yuck and ouch) so it’s included in current peak oil forecasts. What’s the big deal here? A lot of emotional crap clouding the simple idea of rates of acquisition of geological formations. Let the fools have their tar tar sauce.

  10. Northwest Resident on Mon, 29th Sep 2014 1:53 pm 

    “Liquefied natural gas has opened up overseas markets for U.S. shale gas. In a few years LNG will provide for energy security in Western Europe vis-à-vis Russia, currently its main natural gas provider.”

    Yes indeed, Mr. and Mrs. Numbnuts investors. In just “a few years” America will be providing energy security in Western Europe with all that LNG we’ll be shipping to them. And THAT you can take to the bank! Just sign on the dotted line here — no, no, don’t read the fine print, no need for that — just sign right here and I’ll get your hard earned savings put into that American Energy Independence and European Energy Security” fund, and in just a few short years from now you will be realizing fantastic returns on your investment! Trust me!!

  11. Nony on Mon, 29th Sep 2014 2:00 pm 

    Hubbert screwed up a lot. The world oil call. The U.S. gas call. No discussion of the role of price. Very minimal (and by the results inadequate) discussion of technological improvements.

    I also see very few of the caveats that Rock always refers to. Instead I see someone who literally says “we are like explorers who have found all the continents” (in analogy to oil) and who sites a survey of “all the sedimentary basins of the world” to make his peak call.

    Once the U.S. oil repeaks, he’ll have been wrong even on that.

  12. nemteck on Mon, 29th Sep 2014 2:05 pm 

    “…. and there is enough domestic oil to meet 84% of US demand. “. According to the EIA, the US consumed 18.89mb/d during 2013.

    That means the US produced 15.87mb/d in 2013. The EIA lists 7.441mb/d for 2013.

    From where do the other 8.4mb/d come from? Maybe if one counts oil of all sorts, from olive trees to condensates, towards the oil production then the number fits.

  13. Perk Earl on Mon, 29th Sep 2014 2:27 pm 

    “Yes indeed, Mr. and Mrs. Numbnuts investors. Just sign on the dotted line here — no, no, don’t read the fine print…”

    Thanks, NWR. I had a hospital try to take me to the cleaners for an extra $16,291.80 and think as of a conference call with my insurer and a hospital rep. this AM it may be cleared up, so I needed a good laugh.

  14. northwestresident on Mon, 29th Sep 2014 2:33 pm 

    Perk Earl — As you know, peak oil and associated consequences involves some very heavy duty implications. Most of the people don’t get my humor most of the time — thanks for noticing! I’m always trying to lighten the tension up a little by joking around, but still staying focused on the issues at hand. — Damn hospitals! They are totally in it for the money. Yeah, yeah, they’d like to fix you up and make you feel better too — but only after they know you have the ability to pay. Bastards!

  15. Nony on Mon, 29th Sep 2014 6:08 pm 

    U.S. poised to be world’s largest producer of liquid petroleum (defined at crude, condensate and NGLs) this month:

  16. Kenz300 on Mon, 29th Sep 2014 6:20 pm 

    Growing demand for oil from India and China will be the deciding factor on oil prices in the near term. Declining supplies will determine oil prices long term.

  17. Davy on Mon, 29th Sep 2014 6:26 pm 

    Noo, USA, USA,

    That’s great Noo but it is a retirement party. Let’s enjoy our golden years together Noo.

  18. shortonoil on Mon, 29th Sep 2014 7:10 pm 

    Hubbert projected that oil production would follow a logistic curve. The EIA followed that model religiously for 40 years. The 1960 to 2000 reported accumulated production by the EIA deviates from a logistic curve by 0.03 Gb over the 40 year reported production of 769.1 Gb. That deviation probably resulted from rounding error.

    Following the EIA’s logistic curve world production of conventional (all that Hubbert ever talked about) should have Peaked in 2000, it didn’t. It peaked in 2005. In our 57 page report “Depletion: A determination for the world’s petroleum reserve” we dedicate several pages to what happened to that earlier prediction.

    The EIA’s determination of production through 2000 was based on the model that Hubbert had developed. But, that model was slightly in error. This error occurred because when Hubbert developed his model the mathematics to define the petroleum production distribution had not yet been invented. Emanuel Parzen invented it in 1979, and it is called Quantile Statistics.

    The correct model should have been a “skewed logistic” curve. A mathematical oddity that does not have an explicit mathematics function to describe it. All calculations must be done numerically. In our report we have recreated that skewed logistic curve, and it can be seen here:

    Hubbert’s main error was that he was born 25 years too soon. If he had been given access to Parzen’s work this would not be an ongoing conversation. He would have hit world Peak right on the head.

  19. shortonoil on Mon, 29th Sep 2014 7:14 pm 

    If anyone is wondering why we show 2001 and 2006 it is because we use the beginning of the year, and the EIA reports year end.

  20. Nony on Mon, 29th Sep 2014 8:53 pm 

    Utica! Utica!

  21. keith on Mon, 29th Sep 2014 9:28 pm 

    Hey plantagenet, Do you live in the outaouais?

  22. Apneaman on Mon, 29th Sep 2014 11:21 pm 

    Another one bites the dust

    Sumitomo’s US shale oil foray turns sour

  23. Perk Earl on Tue, 30th Sep 2014 3:01 am 

    In the multi-decadal retrospective analysis there isn’t much difference between the logistic and skewed, so Hubbert was a pretty ballsy, smart guy. He got up and told people what peak oil was way back in 56.

    The one’s that come out and have the rocks to do that, like Carter on energy in his sweater or Gore on AGW and Hubbert on peak oil are heroes. They dig down deep and muster up a lot of independent courage to say what they know will be severely criticized, yet it’s something people need to hear.

  24. JV on Tue, 30th Sep 2014 5:24 am 

    Seems to me like increases in US light tight shale oil production are already leveling off.

  25. rockman on Tue, 30th Sep 2014 7:25 am 

    JV – obviously it’s only an illusion since the EIA says it wouldn’t for a long time. What are you going to believe: the EIA or your lying eyes. LOL

  26. Nony on Tue, 30th Sep 2014 10:26 am 

    JV or Rock: Citation needed. Give me the math and the your source for the “seems to be leveling off”.

    Look at the data. We’ve had near linear 1 million bpd increases for the last 3 years (including this one). Source:

    There’s the lying eyes.

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