US shale oil

With the significant increase in oil prices in the mid-2000s, new extraction techniques were developed and became profitable. Whereas crude oil trapped in shale formations had, up until 2010, hardly been recoverable, it suddenly became available. Since then, in particular in the United States, oil production has been rising after years of decline.

This transition has had two important consequences. First, major improvements in horizontal drilling and fracking techniques have led to huge productivity gains (see chart 1) and a large rise in oil production. As a result, while, during the 2000s, the world's increased demand for oil was predominantly met by the OPEC countries and Russia (see chart 2), US shale oil production has, since the beginning of the decade, assumed this role. Second, the geological characteristics of these shale formations and the way oil is extracted have considerably shortened the life cycle of the average oil extraction project. Oil production has thus become much more responsive to oil prices.

While it is rightly reported that investment in the oil industry in the United States has been in free fall since the drop in oil prices, US oil production is unlikely to fall in the near term as productivity gains are still high. Furthermore, were oil prices about to go back to $80 per barrel, investment would rapidly recover … and production would increase. We therefore think that this new actor on the oil stage will help keep oil prices on the low side. Of course, despite its rising importance, this new source of oil has not sheltered the world from geopolitical issues, in particular in the Middle East!

For a deeper understanding of this topic, please consult the full article in the June 2015 edition of our Perspectives magazine.

Emile Gagna
Economist