Drill Shale Oil Well, You Must Not

Any industry which can create a technological quantum leap will be in the front seat to gain massive fortune, as proven by history. The invention of AC generator by Nikola Tesla, for example, resulted in AC system leapfrogging DC system as the globally prevailing power distribution system. Unconventional oil revolution (in this case, shale oil or tight oil) in the form of hydraulic fracturing and horizontal drilling in the US, however, is unlike any other technological advancement in a way that it dragged the oil industry into a dismal misery.    

The year was 2008. Initially, it indeed seemed as a dream come true for a country depending massively on crude oil import when the new technologies acutely triggered larger US oil production starting to that year. Figure 1 displays how drastic the jump is. Following 8 consecutive years of decline until it reached 5 million barrel per day (bpd) in 2008, the US oil production experienced a dramatic upturn as it stretched beyond 9 million bpd on 2015. During that period, oil and gas business was booming, investors put their money on the shale oil business, some analysts even considered US as the largest oil producer on 2020, something that was hardly believed just several years earlier. 

Eventually, a great power will never go unnoticed. This time, the traditional oil titan Saudi Arabia set its sight on the emerging oil industry across the Atlantic. Along with its clan from Organization of Petroleum Exporting Countries (OPEC), they decided to refuse giving up the oil market in which they have been prevailing for decades. Their plan was simple: Pump as much oil as they could at will. The strategy was based on widely understood phenomenon that US conventional oil requires massive capital, mostly due to its fracturing technology. They needed around 50$-60$ per barrel in order to be break even. OPEC countries, or at least Saudi, did not require the price to be at that level as they still possess abundant conventional oil reserves. Unsurprisingly, they poured enormously massive oil supply to the market in the hope that oil price would plummet, severely crippling US oil industry in the process.  

Figure 1: US Oil Production 2010-2016 (in thousands bpd)

War demands sacrifices, and this oil war is in no way different. As a massive oil supply flooded the market, together with weak demand across the globe, oil price was excruciatingly dragged to as low as 30$ per barrel in the closing of 2015, a tremendous 70$ slump from its price just a year earlier. The following consequences were catastrophic, not less than 250,000 people previously working in oil and gas industry lost their jobs, not to mention fatal financial loss in corporations and nations hanging on oil as their main source of income. Kingdom of Saudi Arabia itself suffered from tremendous USD 80 billion budget deficit in 2015, forcing Prince Muhammad bin Salman to prepare for new life without being largely dependent on oil.   

The OPEC battle plan, though through pain and agony, was seemingly triumphant in bringing Arabian nightmares into US oil industry in the early 2016, as Figure 1 indicated a decline in oil production in the following year after a consistent growth during 2008-2015 period.  US shale oil producers are in the brink of entire wipeout since the low oil price excruciatingly squeezed their finances. Eventually, as the Saudis have made their point, oil producers can finally take a deep breath in the aftermath of oil warfare, or can they? 

 In 2015, US lifted economic sanctions of Iran, allowing the noisy neighboring country of Saudi to deliver more oil to the global market as the formerly Persian Kingdom vowed to pump their huge oil reserves. Even worse, US Government finally passed the policy to export oil, with their first shipment already departed on 31st December 2015. For the Arabian Kingdom, this means war.

One exact example of this new battlefront is Japan. Being a huge crude oil importer due to the lack of reserves in its homeland, the Empire of Rising Sun’s crude import was formerly dominated by Saudi for almost one third of total volume. Alas, the Middle East Kingdom now faces more competition from both US and Iran as they are closing in into the East Asia nation. Consequently, another oil war may become inevitable, which almost certainly will push the price even lower. No wonder that in the beginning of New Year, oil price plunged into less than 30$ per barrel.  

Previously designed for more glamorous oil industry, the shale oil revolution, fueled with political and economic intention, turned out to be the beginning of global oil disruption. While the future is still uncertain, it is quite likely that this condition will persist for some more time. Should the oil price rise in the near future, it may be in OPEC’s, or at least Saudi’s, interest to keep it below 50$ in prevention of another shale oil upheaval. Although the Arabian nightmare is still haunting oil producers, they can imitate what the Kingdom does for survival: Reducing dependency on oil. The difficulty may be nearing mission impossible due to the recent condition, but options are available, such as diversifying their portfolio with renewable energy. With all this turmoil, however, may the force be with you.