BP’s forecasts show US shale oil is here to stay
Financial Express reported that there are fewer extravagant parties at the oil industry’s annual gathering in London this week. Pessimism prevails, as the collapse in the oil price leads some of the biggest producers to freeze investment and cut dividends, while banks rush to reduce their exposure to indebted US shale companies. Yet on a 20-year time horizon, this downturn may look like a blip.
In its latest set of long-term forecasts, BP predicts that annual energy consumption will rise by a third between 2014 and 2035 as the world’s population reaches 8.8bn and global output doubles. Fossil fuels remain dominant: although BP expects renewable energy to grow rapidly at the expense of coal, it thinks that the combined share of oil and gas will be roughly constant.
The geopolitical balance, however, is far from static. Most of the additional demand for oil and around a third of the increase in natural gas will come from China and India. The bulk of the additional supply in oil, and a significant proportion of new shale gas supplies, will come from the Americas.
This reflects BP’s belief that any Saudi-led attempt to drive US shale producers out of business is bound to fail.
Instead, the report argues, US tight oil and shale gas producers have repeatedly proved stronger than expected, with innovation and successive gains in productivity leading them to revise the outlook higher.
Of course, BP is hardly an impartial observer: it has its own plans for growth in its US business. Moreover, its forecasts are subject to huge uncertainties. Slower growth in China over the 20-year period would cut the overall rise in energy demand by a third; while the extent to which China succeeds in rebalancing its economy away from manufacturing will have a huge impact on the relative share of different fuels.
However, if even the broad shape of BP’s predictions is correct, the resilience of US shale production carries huge implications both for geopolitics and for global markets. Spencer Dale, the group’s chief economist, spelt these out in greater detail in October.
First, recoverable reserves of oil are increasing more quickly than they are being consumed. There is no longer a strong reason to expect the price of oil to increase over time. Opec can act to maintain its market share, but it cannot fight this structural shift.
Second, because it is a relatively swift process to bring shale oil wells in and out of production, US producers may become a form of shock absorber for the global market. However, because the independent companies operating in the US shale sector at present are highly indebted, in contrast with conventional oil producers, this part of the market is now reliant on banks and creditors and exposed to financial instability.
Third, the pattern of trade is changing irrevocably. In 20 years, the US is likely to be self-sufficient in energy, with oil and gas flowing from the Americas to Asia. This will shape global capital flows and asset prices; and is probably one factor underpinning the resurgence of the dollar.
Source : Financial Express