It’s a big deal. A really big deal:
A new report (The Shale Oil Boom: a US Phenomenon) by Leonardo Maugeri, of Harvard University, sets out just how astonishing this second shale revolution already is. After falling for 30 years, US oil production rocketed upwards in the past three years. In 1995 the Bakken field was reckoned by the US Geological Survey to hold a trivial 151 million barrels of recoverable oil. In 2008 this was revised upwards to nearly 4 billion barrels; two months ago that number was doubled. It is a safe bet that it will be revised upwards again.
The big reason for the upwards revisions is technology rather than discovery. Thanks to faster and cheaper drilling (which means less-rich rocks can be profitable) and things such as “zipper fracturing”, where two parallel wells are drilled and alternately fractured to help to release oil for each other, the oil recovery rate is rising from 2 per cent towards 10 per cent in places. Gas is now nearer 30 per cent. Well productivity has doubled in five years.
Now the Bakken is being eclipsed by an even more productive shale formation in southern Texas called the Eagle Ford. Texas, which already produces conventional oil, has doubled its oil production in just over two years and by the end of this year will exceed Venezuela, Kuwait, Mexico and Iraq as an oil “nation”.
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Mr Maugeri calculates that at $85 a barrel most shale oil wells repay their capital costs in a year. He estimates that even if oil prices fall steadily to $65 in five years, shale oil production will treble in the US because of increasing productivity per well and the easing of transport bottlenecks. By 2017, he thinks, America will be producing nearly 11 billion barrels a day [correction 11 million], equal to its previous peak in 1970. It would need much less in the way of imports. US oil imports peaked at 60 per cent in 2005 and will be below 40 per cent this year.
Internationally the effect is very different for oil compared with gas. Gas is costly to export by sea, requiring liquefaction. This roughly doubles the cost of it, meaning that America’s cheap shale gas boosts its economy at home, and gives it a competitive advantage in attracting energy-intensive industries. (US gas prices are a third or a quarter of what they are here.) Mexico, too, is benefiting because of having a land border with America and pipelines.
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There would be losers. America’s falling appetite for imports may hit Nigeria and Angola harder than the Middle East because of the types of oil they produce, while Canada and Venezuela, whose tarry oil sands are high-cost, would also suffer if oil prices fell. But every oil producer would eventually feel the effect of this falling US demand, so there is no doubting the downward pressure on world oil prices that this revolution is likely to cause.