The benefits to the U.S. from its “revolution” in shale oil production have been far-reaching. The industry generated millions of jobs in the aftermath of the Great Recession. Indeed, former Federal Reserve Chairman Ben Bernanke called the shale boom one of the biggest boosts to the U.S. economy since 2008.
Photo from the NOW 2016 session titled, Energy, Money and the New World Economy. No video is available for this session.
Moreover, U.S. oil output nearly doubled from 2008 until 2015, and production now exceeds that of every member of OPEC except Saudi Arabia. Drastically less dependent on oil imports, the U.S. has gained diplomatic leverage in the Middle East and elsewhere. Indeed, without the surge in domestic production, the U.S. would have likely been unable to secure a deal to curb Iran’s nuclear capabilities because oil sanctions would have failed, according to Daniel Yergin, vice chairman of IHS, a global research and information company with 9,000 employees in 33 countries.
Thanks to shale, the U.S. is now a “short-cycle producer,” and many production companies in the U.S. can ramp up or wind down output quicker than most competing sources of oil. Over time, such flexibility will help keep prices relatively low or moderate, though with a potential for volatility, Yergin predicted at the NOW 2016 conference. Major disruptions in supply could change that outlook.
Although other countries are stepping up efforts to tap energy from shale, they are unlikely in the foreseeable future to challenge the pre-eminence of North American producers, Yergin said. The U.S. holds advantages that are difficult to duplicate, including its approach to regulation and its laws that give landowners mineral rights, he said.
At the same time, Yergin said, producers need to pay close attention to the public’s environmental concerns, while noting that shale production is a highly regulated activity. Yergin cited a report by the Obama administration’s committee on the environmental aspects of shale—on which Yergin served—which found that the environmental aspects are generally appropriately managed.
Yergin is one of the most soughtafter thought leaders on the interplay of energy, international politics and the global economy. His book—The Prize: The Epic Quest for Oil, Money and Power—won the Pulitzer Prize. His most recent book, The Quest: Energy, Security and the Remaking of the Modern World, describes the new geopolitics of energy, the emergence of new sources of energy and competition among nations to achieve energy security.
Even Yergin is reluctant to forecast the price of oil. Anyone tracking the oil industry needs to be prepared for “the inevitability of surprise” from forces including geopolitics, major economic shifts and technological change, he said. Still, he said, he expects to see a better balance in 2017 between oil supply and demand. Oil would need to rise to about $60 per barrel to induce an increase in production, he said, predicting that $100-per-barrel oil is unlikely to be the norm. The wild card would be a major disruption of supply from exporting countries.
Oil prices peaked at $147 per barrel in the summer of 2008. For several years, prices hovered around $100 a barrel until the OPEC meeting in November 2014. Since then, the price of oil has fallen, hitting a low of $26 in February 2016 before recovering in May 2016 to a range of $45 to $50. Lower prices have compelled U.S. producers to improve efficiency and accelerate innovation. Yergin estimated that a dollar invested in oil production today has twice the impact of just two years ago.
While gas-powered cars are unlikely to disappear anytime soon, Yergin said he expects that public attitudes and regulation will lead to greater use of hybrid and electricpowered vehicles. Tesla has changed public perceptions of the electric car, he said, from the “egg on wheels” of the 1990s to an attractive, stylish and high-tech vehicle. With its Model 3, Tesla aims for volume, supported by the construction of its Gigafactory battery facility. Yergin noted the irony that the first lithium ion battery was developed by Exxon in 1975, when it was thought that the world was soon going to run out of oil.
At Brown Advisory, we seek to partner with innovators in the energy industry and companies that show promise of long-term success. Yergin said that pioneers behind the shale revolution showed what Walter Issacson’s biography of Steve Jobs calls a “reality distortion effect’’—a combination of focus and willpower that broke through established wisdom, skepticism and institutional obstacles. Their boldness vaulted the U.S. among the world’s top three oil producers, reducing its imports from 60% of total supply to 25%— an achievement that, a decade ago, seemed definitely out of reach.
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