Peak oil refers to the point in
time when the production of petroleum reaches a maximum rate of extraction,
after which production is expected to terminally decline. The rise of American
shale production in recent years has been a major factor contributing to the decline
in oil prices, and has led some analysts to predict we have finally reached
peak oil. This projection is alarming, as the period following the peak is
often associated with insufficient supply and rapidly escalating oil prices. However,
I do not see the current situation as concerning to energy security over the
short or medium-term in the United States. Production of oil is expected to
increase over both time horizons. Shale oil viability in the United States has
fundamentally altered the global oil market, flooding it with new supply and,
thus, setting the equilibrium price at a considerably lower level.
Additionally, the rise of shale has decreased OPEC’s share of global oil production,
diminishing its ability to manipulate prices and allowing American shale to
balance the market.
Non-OPEC
Supply
Non-OPEC countries supplied
56.45 million barrels per day (mb/d) of petroleum in 2014, a 2.1 mb/d increase
from the previous year. Production is projected to increase by 0.8 mb/d in 2015
and 2016. Production growth is slowing in the U.S., Canada and Brazil, three
major contributors to growth in recent years. However, the forecasted reduction
in the rate of growth is attributed primarily to low projected oil prices rather
than diminishing supply. This leads us
to the importance of shale in North America.
One
characteristic that makes shale oil production unique is its highly responsive
price elasticity relative to conventional crude. Short lead-time, payback time
and rapid well depletion allow shale producers to respond faster and more
effectively to changes in supply, reducing production when oil prices are too
low for profitable extraction (most projects are profitable at $80/barrel) and
increasing production when prices are attractive. Given the United States’ high
level of oil consumption, this is a fortuitous development. As was witnessed in
November 2014, when OPEC and other conventional sources of low-cost crude
attempt to protect market share by pricing shale out of the market, American
consumers benefit tremendously through reduced gas prices. Alternatively, any
attempt to increase oil prices by reducing supply will be met with a quick
shale production increase in the United States, creating domestic economic
activity and stifling market manipulation. This new dynamic is allowing shale
producers to take the, traditionally Saudi, role of market balancer.
OPEC
Supply
OPEC members produced 36.49
mb/d of petroleum in 2014, unchanged from the previous year. Production growth
took place in Iraq and Iran, but was nullified by declines in Libya, Angola,
Algeria, and Kuwait. Production is expected to decline by 0.1 mb/d in 2015 and
0.4 mb/d in 2016. Over the two-year forecast, Iraq is expected to contribute
the most to production growth within OPEC. However, Iraq’s growth is unlikely
to outpace declines in production from other Persian Gulf countries.
Additionally, the threat of the Islamic State (IS) make Iraq’s production level
difficult to project.
OPEC producers experienced high
levels of oil supply disruptions in 2014, averaging 2.4 mb/d and increasing by
0.6 mb/d compared to the previous year. Almost all growth in disruptions came
from Libya and Iraq. If a level of stability can be restored in the Persian
Gulf and North Africa, there is significant potential for production growth
through the reduction of supply disruptions.
Global
Demand
Consumption of oil increased by
0.9 mb/d for an average of 92.1 mb/d in 2014. Similar levels of growth are
projected for 2015 and 2016. The center of gravity for oil consumption is
shifting to the Far East, away from OECD members. China is leading the way,
accounting for 0.4 mb/d of growth in 2014, nearly half of all global
consumption growth. China’s consumption growth is projected to drop slightly to
0.3 mb/d in 2015 and 2016 due to recent declines in key manufacturing indicators.
Despite sluggish demand in OECD
countries and significant declines in projected consumption in Russia due to
its recent economic downturn, total world consumption is expected to increase
by 1.0 mb/d in 2015 and 2016 on the strength of demand from non-OECD members
and the United States, which is projected to experience consumption growth of
0.3 mb/d in 2015. Rising oil demand puts additional pressure on supply,
particularly if a peak oil situation arises. However, the shale revolution is
likely to keep prices suppressed to a reasonable, if not attractive, level in
the short and medium-term.
Conclusion
I do not see peak oil as a
major concern to the United States' energy security or economic health. Most experts do not project a downturn in
total oil production in the short to medium-term; long-term projections are
inconsistent, reflecting the difficulty of projecting far into the future with
any degree of accuracy. However, we can be certain that shale oil has placed
the United States in a much better energy security position, both prior to and
after peak oil. The availability of domestic shale limits the effectiveness of
OPEC’s supply suppression. Additionally, when prices rise to the (still
reasonable) point that shale operations are profitable, the production will be
domestic. This keeps capital in the U.S., supports jobs, and can have a
multiplier effect that is beneficial to the greater economy.