There *is* a shale oil revolution...


And it reshuffles the balance of power on oil markets. It implies rising output outside of OPEC, while OPEC will produce much less than previously expected.

The International Energy Agency (IEA) has recently published its annual ‘World Energy Outlook’ (WEO), an authoritative account of where the global energy markets might be heading in the next decades.

Last year, their big story was the U.S. shale oil revolution: thanks to a few technological breakthroughs, the United States had suddenly become able to produce much ore gas and oil than previously. This will probably make North America an oil exporter by 2030.

So it came as a surprise that many reports covering the new WEO claimed that the IEA had changed last year’s ‘optimistic’ take to a more ‘pessimistic’ one: if Middle Eastern countries postpone their investments because of the shale boom, their hesitation may result in an oil-supply squeeze. In other words, prices could be high, because sufficient oil supply would be delayed.

Sure, this is catchy; but it’s not what the IEA’s forecast numbers reflect.

The chart below compares the IEA’s most recent oil production forecasts with its predictions published last year and in 2011. Two years ago (as the dotted line shows), it believed only OPEC countries could substantially increase their output, while non-OPEC production would almost stagnate until 2020, and then decline.

But then came the shale oil boom: today, the IEA’s experts think (as the continuous lines show) that, led by the United States, oil output in non-OPEC countries could rise significantly until 2020. This implies that OPEC output is likely to stagnate until 2020, despite growing energy demand from China and other emerging economies.

The IEA thinks this might change again from around 2020: tight oil production stalls, so non-OPEC production starts to decline. This gap is filled by a boost in OPEC’s output, as it still has vast and relatively low-cost reserves.

But the chart makes clear that if last year’s Outlook could be labeled ‘optimistic’ then the current one is even more so (overall global oil production is higher and OPEC’s power declines).

For the OPEC members, of course, this is rather bad news: if I were an OPEC-producer, I would also take a ‘wait and see’ approach and not be investing heavily. The more so as the political changes in Iran might also lead to more oil supply, narrowing the playing field for the rest of OPEC.

So the balance of power in the oil market is changing. A more general lesson is that the more catchy the title of a news story, the more suspicious it is.

-- Péter Vargha Simon, MOL


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