The Shale Oil Revolution: An Alternative To Conventional Crude Oil?

Petrol and Diesel in India have crossed Rs 100/litre. Crude oil is getting expensive and with prices refusing to fall, global oil-producing countries like Saudi Arabia, UAE, Russia, etc. are involved in a deadlock. While oil prices are in dismay, an alternative source to conventional crude oil is thriving in the US. It is the Shale Oil and Gas Industry. In 2020, the United States of America turned a net exporter of ‘petroleum’(not crude oil) for the first time since 1949. In this piece, we discuss the Shale Revolution in the US, the difference between Shale and Crude oil, and the economics around it. 

What is Shale Oil? How is it different from crude oil?

Speaking of conventional crude oil, it is a viscous liquid substance found beneath the surface of the earth. It can be found on land or the sea. Crude oil can be extracted directly, it is easy to transport, process, and refine. There is an abundance of crude oil reserves around the world. 

Coming to shale oil. Shale oil is mostly found on land, but sometimes also found underneath water basins. It is extracted from rocks called oil shales. These rocks are broken or fractured artificially in a process called fracking. A mixture of oil and gas erupts from these rocks which are later extracted and processed to form shale oil. It can also be used to produce a more gaseous form called shale gas. Shale oil and gas are pretty much the same as crude oil and natural gas. Just that they are obtained from special rock structures called ‘shales’.

The process is relatively new, stirring a debate on whether the oil is environmentally friendly or not. There has been a rising ‘anti-fracking moment' in the US, whose supporters argue that the method is not environment friendly.

Shale Economics

America saw a huge jump in oil production between 2010 and 2015. This was the period when the US invested intensively in shale oil discovery. In 2020, shale oil accounted for a staggering 65% of the total crude oil produced in the US. That is a huge number. 

There are two major problems that shale oil poses. First, its extraction is a costly affair. Second, it poses a major environmental threat. Oil shales deposits are generally deeper than crude reserves. The only way to extract is to drill deep beneath the surface of the earth and extracting it. The next challenge is processing it to convert it into crude oil and petroleum.

The cost of producing one barrel of shale oil is anywhere between $35-$65. Shale oil companies would make money only when the global crude oil prices are greater than the cost of production, assuming that the demand remains intact. Essentially, higher prices would work in the best interests of the US.

There is a question that analysts pose. Are shale companies profitable? There is no black and white answer to that. Some shale companies that seized opportunity dug the right oil wells and cut down on costs, were profitable even when crude oil prices were at  $40 per barrel, much lower than the breakeven price. 

The shale oil industry saw tremendous growth under the Trump administration. Former US President Donald Trump followed an expansionist policy and believed that his country needed to be energy independent. Trump administration invested extensively in the oil and gas industry in the US. It pushed for discovering and setting up new oil fields. The current US President Joe Biden is rather conservative when it comes to the oil and gas industry. He is pushing for production cuts and lower prices because of its negative impact on climate change, the environment, and marine life. He is also in favor of renewable and cleaner sources of energy. This is something that should worry the shale oil industry. 

Speaking of the environmental impact of shale extraction. There has been a rising anti-fracking movement in the US, led by climate change and environmental activists. France, the Netherlands, Scotland, Ireland, Wales, Denmark, Bulgaria, and some other developed economies have ‘banned’ fracking for shale oil. Even in India, ONGC did start with shale gas exploration, but it yielded no results. Exploration projects in other countries have gone in vain and have been abandoned. The only country that seems to be successful in turning it into a profitable venture is the United States of America.