FORBES ARTICLE

So is there a future for shale oil?

Some observers argue that shale drilling is an expensive, inefficient technology that only flourished briefly because the price of oil was temporarily so high. That argument ignores how little new supply the market has seen from conventional sources in recent years. Even though prices plateaued to just above $100 a barrel, global oil production from conventional sources did not grow.

Looking ahead, the global appetite for oil will rise steadily — mainly from continued industrialization in China and other emerging economies. Recent years have shown that oil supplies from conventional sources would not begin to satisfy that demand even if prices returned to historic highs.

Of course, the recent past may not be a good guide to the longer run. The ongoing turmoil in the Middle East has affected some of the region’s major producers. Iraq’s oil output has risen by 1 million barrels a day since 2010, and Iran’s production fell by 1 million barrels a day after economic sanctions were imposed. If economic sanctions are now lifted, Iran can be expected to gradually restore that production.

Will OPEC absorb that increase within the cartel’s quota or will the quota rise to accommodate Iran? Barring any surprises, it seems likely that increased output from the Middle East will at least offset the likely decline in conventional oil from other areas. However, as the recent scud missile attack on Saudi Arabia from Yemen reminds us, surprises are to be expected.

Is it likely that the Saudis and other low-cost Gulf states would expand their own production sharply and for an extended period? Some observers are skeptical of how far they could go even if they wanted to. Questions about OPEC strategy do not turn just on what is technically doable but rather on what is profitable.

Just as a cartel benefits from cutting output to raise price, it suffers from raising output to lower price. This would not be true if it could permanently eliminate competitors by temporarily lowering prices, but that is not the case here. The shale oil industry is resilient and flexible – just as it can be pushed out of the market by very low prices, it can promptly get back into the market when prices improve. So an extended attempt by OPEC to close down the shale industry is a lose-lose situation, and as such is very unlikely to happen.

George Perry is a Senior Fellow in Economic Studies at the Brookings Institution.