The discovery and production of shale oil in the United States has led to a ‘revolution' in the industry. This development, which will transform the United States into an oil- and gas-exporting country, is garnering wide attention in light of the shifts it will create in the US economy and foreign policy. Recently, British energy expert John Mitchell shared his insights on the issue, in a study published by UK think tank Chatham House titled US Energy: The New Reality. Mitchell concludes that the rise of US gas production reflects rapid and continuous attempts to develop the technology involved, rather than being a single technological breakthrough. That technology, he wrote, is now already being applied in states like Texas, North Dakota, and Pennsylvania. Like other observers, Mitchell mentions that estimates of reserves that are recoverable (technically and economically) vary widely. Nonetheless, he inferred, these estimates will have a very limited impact on production over the next two or more decades. In the long term, however, there are uncertainties as to the proportion of those resources that can be recovered economically, as well over the potential environmental impact of shale extraction. According to the energy expert, shale production will inevitably slow down at some point in the future. The US shale revolution began with the turnaround in natural gas production in 2006. Natural gas output increased from its low point of 18 trillion cubic feet (tcf) in 2005, to 24 tcf by 2012. Unlike in the oil sector, consumption of natural gas in the United States rose by about 14 per cent over the same period. But despite the large increase in gas consumption, growing US production allowed gas imports to decrease by nearly two-thirds, to 1.6 tcf (mostly from Canada), representing 6 per cent of overall US consumption. Projections indicate that the rise in US shale gas production will increase gas consumption in the United States, which has already begun. The Energy Information Administration (EIA) expects that the rise in prices will be limited and gradual, from about $4 per million British thermal units (BTU) in 2020, to about $5.4 by 2030. This raises two questions: Will these prices cover increased shale gas production prices; and will it be possible to maintain these domestic prices, if the United States exports large quantities to the global markets? It is worth mentioning that the United States has granted only one license for the construction of a gas liquefaction plant/export terminal so far, but President Obama has stated that he is reviewing this, and would perhaps open the door to exports to establish an organic link with the global oil and gas industry, and create a unified global market with homogenous prices, as is the case in the oil markets – compared to the fragmented gas markets. In Chatham House's study, Mitchell states that despite the slogan of ‘energy independence' being championed by various US presidents since Richard Nixon in 1973, the reality is that “interdependence" among consumer and producer nations will continue to define energy policies. He wrote, “What the revolution in US energy has done, and will continue to do, is to...increase US freedom to determine energy, economic and foreign policy without the constraints that increasing import dependence has for so long placed on policy." US reliance on crude oil imports decreased rapidly in recent years, as a result of rising domestic production (shale oil) and reduced consumption. After a sustained increase in imports since 2000, this picture changed in 2008. Crude oil output rose in 2012 by nearly 30 per cent compared to 2008, with the supply being supplemented by increasing production of liquid biofuels. Consumption, meanwhile, fell by 17 per cent since 2005, as a result of the global financial crisis and subsequent recession, and also because of the improvement of fuel-efficient technology used in vehicles. US oil imports declined to around 7.8 million barrels per day in 2012, representing 42 percent of oil consumption, while in 2005, oil imports represented 60 percent of US consumption of liquid fuels. US Department of Energy forecasts indicate that domestic oil production would continue to increase in 2013 and 2014, which will reduce the volume of oil imports but not stop them altogether. Mitchell reached several conclusions, most notably that the United States is embarking on a new era, away from a long history in which energy has been an economic and security liability, to a situation in which it will be a source of economic strength and geopolitical security. And despite the fact that shale oil is located mostly inland far from export terminals, and despite logistical costs to get the gas to international markets, US gas prices will remain low compared to international prices. This will help improve the competitiveness of US goods and reduce power generation costs. Next, US energy imports will fall, at the same time as imports from the Middle East will have been absorbed by Asian markets. This means that US dependence on Middle East oil imports will decrease, and will eventually disappear and remain limited to Saudi Arabian supplies to Saudi-owned refineries in the United States. As a consequence, US commitments to defending Middle East export routes will come into question. Lower imports by the United States will also reduce its obligations to hold strategic stocks within the International Energy Agency (IEA) regime. Finally, Mitchell predicts that the United States will continue to have an economic interest in global energy security. He also believes that the United States will continue to import oil, even if only from Canada and Mexico. Furthermore, Mitchell purports, US oil prices will spike or fall when global prices change. * Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
