Fracking and the Shale Gas Revolution
Why your gas is cheaper and the world is a different place
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Grace Meikle | September 2016
Guess what country is the number one produce of oil and gas in the world?
Nope, it’s not Saudi Arabia, or anywhere in the Middle East...anymore. Over the past five years, thanks to the Shale Gas Revolution, the United States has rocketed into first place.
Not long ago, the United States depended on the Middle East for its oil. So much of recent history is based on oil politics: Desert Storm, and the Iraq and Afghanistan Wars to name a couple big ones. It’s also why, until recently, the United States government shared a “special relationship” with the government of Saudi Arabia. All of that, directly or indirectly, had to do with securing a steady Middle Eastern oil supply.
It’s all different now, thanks largely to fracking and the shale gas revolution. My, how the tables have turned. We just don’t really NEED Middle Eastern oil anymore because we suddenly have so much of our own.
So what is fracking and why did it cause a revolution?
In the United States around 2008, we figured out a way to economically get a lot of oil and gas really quickly from a certain type of rock called “shale”. In shale, also called “tight shale”, oil and gas are embedded very tightly in the rock, and cannot simply be pumped out, as in “conventional” formations. The formation must be cracked open – or fracked – so the oil and gas can be sucked out.
Fracking, as you likely know, is a technology shrouded in controversy. The fact remains, however, that it revolutionized the U.S. oil and gas industry by opening up a whole new domestic supply of oil. Consequently, the United States started exporting oil like crazy and flooded the global market. This drove down the price for a barrel. This in turn drove down the price of gasoline (which is the part that you probably noticed).
Normally, the Organization of Petroleum Exporting Countries (OPEC), a cluster of countries in the Middle East that more or less controls global oil supply, regulates the price and hence the supply of oil. Oil is like the blood of society; so many aspects of our lives depend on it. In the past, OPEC always protected this critical global industry from big surprises.
When the United States emerged as a major competitor, however, Saudi Arabia and the other OPEC nations did not react in the way they normally would. They did not welcome the competition. On the contrary, they had a list of geopolitical and economic reasons to want to squeeze their competition out completely.
OPEC, namely Saudi Arabia, did not slow its production of oil, which would have stabilized the price. Instead, they kept pumping away as fast and furious as ever. Meanwhile, the U.S., Russia, and other countries all did the same; everyone wanted control of the market and no one would back down.
This price war reached its peak at the end of 2014. Competing nations created an oversupply of oil, and the price plunged to less than half its value, from over $100 per barrel in the summer of 2014 to under $50 by December. Likewise, in the summer of 2014 you were probably paying at least $4 per gallon and now you’re likely paying half of that.
The price continued to fall over the next year, bottoming out around $27 per barrel in January of 2016.
What’s OPEC’s strategy? Why didn’t they regulate the price; why did they let it fall? Well, different countries are able to produce oil for different prices. In Saudi Arabia’s case, it’s about $11 per barrel. In the U.S. it’s about $30-40 per barrel. In places like Canada and Russia, it’s close to $60 per barrel.
It’s a simple case of cost versus earnings. If I’m Canada and it costs me $60 to produce a barrel of oil, if I can sell it at $110, that’s no problem; but if I have to sell it for $40, that is a VERY big problem. Of course the true picture is somewhat more complicated, but this gives you a general idea.
Saudi Arabia’s idea was that they could last the longest through the price downturn. They wanted to drive competitors like Russia and the United States out of the market.
Their plan is not working.
First of all, many members of OPEC do not tax their citizens because their governments are used to making so much profit from oil. That’s no longer the case, and those governments are now hurting.
Second of all, the United States shale industry turned out to be much more resilient to the price drop than OPEC expected. Sure, it’s been tough; but now we are more efficient than ever. And we keep pumping, or better yet, we’ve turn off the pumps and are waiting to restart them at a moment’s notice, as soon as the price goes back up.
For now, oil hovers around $40 per barrel; it appears to have bottomed out, and may be making a slow but excruciating climb back up. Many in the industry say it won’t return to summer 2014 levels any time soon, so you can likely expect cheap gas for a while to come.
Mind you, however: all this happened due to what in fact was only a 1% oversupply. There are a number global events that could turn the tides very quickly, and oil could go right back up again – namely a war, or anything that threatens global supply. So stay tuned, because there’s more in store for you in this revolution than just cheap gas!