The Phenomenon of Shale Gas Revolution - Research Paper Example

The Phenomenon of Shale Gas Revolution The advance of shale revolution has brought significant changes in the world today at political and economic levels. Increase of gas from the shale revolution could mean decreased energy prices and since the gas can substitute oil, subsequently the price of oil will go down. For the pioneers of the venture that is the North American continent, it means a step closer towards self-sufficiency, while for the major gas and oil producers there is reason to worry as it will mean decreased revenue. The political climate between the main shale gas producers that is the United States and the main energy producers like Russia and Gulf States is likely to heat up due to the revolution. The cost of gas is projected to go down as there is surplus production. The future of the revolution depends on proper policies to solve any crisis and bringing balance in regard to energy prices that will be suitable for both the countries experiencing the revolution and the major oil and gas producers. Keywords: shale gas, revolution, energy, revenue, producers, gas, Gulf States, United States, North America, surplus, Canada, continent, markets, technology Introduction In the recent past, the energy sector has witnessed some technological advancement aimed at resolving the global energy crisis. Research beyond the current crude oil reserves has led to significant discoveries such as shale oil deposits that have added to the annual increase in production of oil and gas. These developments are thought to play a significant role in the global oil markets and energy at large. The technology is prevalent in the North American continent that is United States and Canada, who are exploiting the venture in large scale. Shale gas is said to be one of the greatest energy revolutions of all time. Although the technology is in its infancy stages in America, implications both political and economic go beyond its borders. Adversaries and allies of the United States will experience different effects due to the diversity of ways through which the technology will influence international energy markets and politics. Although there are a lot of uncertainties regarding the global energy markets, shale technology offers a great deal of ways that will enable America take advantages in the geopolitical sphere. The promise and potential of shale gas production are relatively high with the ability to impact substantially on the market economy. Shale gas presents a cheaper source of non-renewable energy that is environment-friendly, and most plants are substituting coal for it. However, the potentiality of shale technology depends on the primary producers that are Canada and the United States who are currently the supply hub. The technology has helped them to increase their national production from shale reservoirs. With proper planning, shale production could be a revelation in the energy sector not only to the United States of America, but also the entire world. Background of Shale Gas Revolution The concept arose in the United States in reference to the domestic supply of gas. It forms part of the unconventional gas according to the United States geological survey. The gas is sourced from the accumulations with hefty spatial dimensions and indistinctly defined limits that exist independent of the water column. Unlike conventional gas drilling, it is not sufficient to produce a commercial flow hence other recovery processes need to be incorporated. Shale gas is natural gas that is trapped within fine-grained sedimentary rocks that are rich in petroleum and natural gas. The extraction process of the gas from the rocks employs horizontal drilling of the rocks and hydraulic fracturing (Stevens, 2012). It involves injecting sand, water, and chemicals to the horizontal borehole of the well at an extremely high pressure in order to fracture the shale formations and hence release the gas. The drilling technology dates back to the 1930s, and it was first applied in fracturing a well in the United States in 1947 (Rogers, 2011). Shale gas production has risen in the recent past to reach tremendous units compared to natural gas. In the 1990s, the estimates of global shale gas resources are said to have exceeded those of natural gas. By mid-2000s, the application of the technology changed shale gas development into a significant oil and gas industry growth sector (Rogers, 2011). The technology is turning out to be important as gas-poor countries can have enough cheap gas for the future at the present consumption rates. By 2006, the shale gas production had ramped up and the effects of the revolution begun to be felt in the United States. The government invested large sums of money into the shale venture to support the operating companies. Critically, the United States government has been behind the shale gas developments since it has been supportive all along. In 2010, shale gas developments in the United States had significant effects on the global gas markets by creating an oversupply of liquefied natural gas, hence putting a downward pressure on gas prices. During this period, the hype about the prospects of shale gas rose globally more so in western European countries. However, there have been serious shortcomings in achieving the potential of shale gas production with projections that if the technology turned to reality, then global gas prices could fall (Vihma, 2013). On the other hand, if the full potential of shale production could not be realized, then demand for natural gas will continue to grow and in due course, supplies could tighten, hence rise in prices. The shale gas revolution has had significant impact on the United States domestic gas prices since its inception. It is estimated that prices in 2010 were less than $5.00 per million British thermal units regardless of consumption being projected at a historic high (Foss, 2011). According to The Energy Information Administration, wellhead prices in 2010 averaged at $3.45 per thousand cubic feet, which decreased to around $2.46 in 2012, leaving future prospects of gas prices unpredictable (Foss, 2011). Similarly, global liquefied natural gas surplus created by the shale gas revolution has led to decrease in prices in what has turned out to be something of a buyers market. Across Europe, the revolution has threatened to flag the long-established links between gas and oil prices. Although the revolution has been a revelation in the energy sector, several issues have been raised regarding environmental safety with strong opposition to the fracking process. However, technological innovations have led to decrease in the cost of shale gas production. The need for energy self-sufficiency in the United States has risen due to unstable global oil prices that keep increasing and political uncertainties in the Middle East caused by the Arabian revolutions. This is an indicator that the shale gas revolution will continue given that new technology supports domestic liquid fuels production. The shale gas revolution is not just United States phenomenon. It is becoming popular in North America with Canada being believed to have vast reservoirs that are increasing its fuel supply. Mexico is also thought to have vast reserves of shale gas, as it stands as the 6th largest world shale oil reservoir and with technological advancements, Mexico will soon hit large scale production of shale gas. Economic Implications of Shale Gas Revolution Despite the relatively low prices of gas, the shale revolution has had a minimal economic impact in the short term, although in the long term, effects will be felt. The immediate economic effects of shale revolution include a decrease in gas prices as well as reduced oil imports. In the last ten years, gas production has increased tremendously in the United States, with shale gas forming the bulk of production. As a result, oil imports decreased by a factor of 3 million barrels per day in a period of less than five years. The fall substantially occurred due to a drop off in energy demand coupled with increased domestic production. The shale gas revolution has had a varied effect on consumer energy prices with residential prices thought to fall by close to 20%, while industrial energy prices decreased by 50% (Hou et al., 2014). For households however, the shale gas has largely been outweighed by gasoline prices. The shale gas implication on the economy falls into two categories. The first on is the income effects that result from the economic good, like gas being produced cheaply and if consumption remains constant, whatever was previously used in the gas can be invested elsewhere. There are also the substitution effects that result from the change in gas prices, which may affect the prices of other goods where gas is an input; hence effects could be felt in other sectors of the economy (Aguilera & Radetzki, 2013). Economic analysis indicates that effects on GDP by the substitution effects are negligible hence affect only part of the economy, and therefore will only contribute to GDP in the long run, but have no impact on the growth rate of the economy. The shale gas revolution has led to a positive supply shock that has resulted in lower gas prices due to improvements in technology. Economically, the positive supply shock is reflected by a shift in supply, while demand remains unchanged hence leading to higher quantities at lower prices. The boom to drill shale gas led to significant decrease in oil prices because of oversupply from the production of gas. Although the prices reduced in the short term, they are deemed to increase once shale production stabilizes. In the long run, the prices will generally remain lower compared to a situation where there could not have been shale gas production. The future of these oil prices depends on both demand and supply, and the general cost of production of oil since gas and oil are substitutes (Boersma & Johnson, 2012). Coal is also among the nonrenewable sources of energy that have been significantly affected by the advancement of shale gas, pushing coal into export markets aided by the rising spot prices of gas. There are presumptions that OPEC members are prepared to react with production cuts that are arising from non-member supplies. The production cuts in turn lead to spare capacity in OPEC countries that requires a balance of the supplementary supplies (Jacoby, Osullivan & Paltsev, 2011). There is confusion as to how the organization will hold together, especially with the present political climate. Shale gas production will place the United States among the top world energy producers. The shale revolution is good news for the global economy, at least for the short term. However, there have been debates whether the cheaper prices resulting from shale gas in the United States put her in a better competitive advantage. The most important global issue is the capital flow that comes with the expansion of production centers. These global imbalances pose a threat to the global economy, as the United States will seek to finance these capital inflows from countries with an external surplus. China presents a prominent example of these capital inflows with the United States importing most of its capital from the Middle East (Hou et al., 2014). The problem could arise as rolling over the financial requirements for the inflow may prove to be unsustainable, thus creating global economic instability. There is potential in the energy imbalances to improve the balance of payment deficits. Shale gas provides a way to move towards energy sufficiency to reduce the deficit. Rising energy imports lower the trade surplus and should the lower oil prices happen then there will a dent globally including the surplus of the Middle East oil producers. A Global economic balance, therefore, is visible as the shale revolution presents a means for energy markets to stabilize. Even though the production state is still moderate, it still promises tremendous global impact that projects that the balance of payment effect will eventually dwarf the dispute about energy prices and global competitiveness. Shale gas revolution is predicted to leave a considerable effect on the global macroeconomic sphere that is good news for the global economy. Political and Policy Analysis of the Shale Gas Revolution The shale gas revolution will bring significant changes in world politics especially among the countries that control the oil economy in the world. However, these changes will greatly depend on the sustainability of the shale gas revolution and the extent to which it can be replicated in other areas rich in the gas. New policies such as increased environmental regulations and decisions on the infrastructure employed may also affect the growth of the shale revolution. The growth though will influence global politics in three major ways that are; the price of oil, shifting patterns of the energy trade and integration of natural gas markets. The primary focus of global politics is how the shale revolution will affect the shifting trade patterns that have been impacted on by the American shale gas production. The shifts are profound and are predicted to continue growing as America changes from an energy importer to an exporter. The shift has at least caused a short term rift with foreign countries that once relied on exporting their gas to America. For instance, the Nigeria Liquefied Natural Gas that used to supply United States markets with gas has shifted its flow elsewhere due to the shale revolution (Spenser, Sartor & Mathieu, 2014). Equally, crude oil export has declined since shale gas can be a substitute for oil. The effects of these shifts in trade on politics greatly depend on the extent to which economic exchange underline political relationships. There is belief that countries that trade are less likely to go to war although historically, the rule is far from ironclad. The gas business has ability to stabilize political relationships because of the massive infrastructure required and its inability to be replicated elsewhere. Oil though has minimal effect in strengthening political ties due to its nature as it can be shifted to other destinations. The perception is supported by the decision by Saudi Arabia to discount its oil to the United States so as to remain top notch in the 1990s. Similarly, the ease with which new trade markets will be established poses a significant political issue. Depending on developments elsewhere, the shale revolution could in the end change the global oil market from the suppliers’ market to a buyers’ market. The American shale gas revolution has also had changing effects on the natural gas markets thus playing a part in the regional politics. The revolution in combo with the Fukushima events and high oil prices widened the gap between gas prices between the Americas, Europe, and Asia. The projection that the North American continent will soon be a major supplier of liquefied gas among other developments elsewhere will have a negative edge. The increase in gas production at even lower costs will add liquidity to the global gas market, thus provide consumers with more arbitrage opportunities and encourage the growth of short-term markets (Stevens, 2012). Even though price differentials will continue to exist between the three markets because of cost incurred in transportation and market development, one will eventually edge others. The prices will edge closer, and indexation of oil will continue to be under pressure. Gas availability to consumers will rise through the spot market with the spot price increasingly figured into pricing formulas for the establishment of long-term contracts between states. Another way the shale revolution will affect global politics is through its impact on oil prices and the fiscal viability of particular regimes. With no clear defined future price of oil, the estimates reflect the diverse assumptions based on technology, global economic growth, demographics, and policy. The result is variance in future demand and supply projections and differences in oil prices (Yergin & Ineson, 2009). The shale gas though is said to impact significantly on the oil prices by putting downward pressure on it and introducing new sources of global supply. Policy Analysis and the Future of Shale Gas There has been a lot of debate among policy makers on the shale revolution concerning its functioning in the global energy market. The discussions expose tradeoffs between advancing political interests and promoting economic efficiency and domestic growth. Globally, there is diversity regarding energy policies hence appropriate policy actions are essential to justifying the shale gas productions. There is a need to re-conceptualize the strategic petroleum reserve in readiness for a post-OPEC world. The shale revolution adds to the global oil market that will eventually lead to the demise of OPEC, which will come as a relief to the westernized countries. For consumers however, it will be lamentation as they wont rely on OPEC to regulate prices anymore. The unstable energy prices pose a threat to the economy, thus there is a need to consider how to expand and change the strategic petroleum reserve (Hughes, 2013). That way, it could be easier to balance the energy market in the absence of major oil producing countries’ ability to do so in the near future. With major regional powers being unstable policy makers, there is need to come up with a concrete contingency plan that can come in place in case of crisis. Major oil producers will face difficult times as the advent of shale gas production continues to put negative demands on energy prices. Varied outcomes in the different countries may cause a panic that may turn out to be a crisis hence it calls for a way to solve such problems in the event they occur. It may be through cooperation with friendly nations to deal with the problems arising from the low energy revenues. Energy and climate should be refashioned to form an integral part of the relationship between the United States and China. The shale revolution provides many conformist avenues to the establishment of strong Sino-American ties. There a range of reciprocal benefits to both China and the United States varying from investment, technical exchanges, and energy. Washington and Beijing have an arrangement to help China tackle environmental issues, such as carbon balance. The shale revolution provides a platform to discuss issues of climate change, trade and investment, as the gas can replace coal in Chinese industries (Yang & Jackson, 2012). Policy makers and stakeholders should expand the energy dialogue to be more discrete to provide avenues for defining and developing a strong relationship on climate and energy. The new policy should be in place to review the United States ties with the Gulf countries since it is shifting towards self-sustenance. The Arabian nations are aware of the United States withdrawal from the region, as it moves to energy sustainability due to the shale revolution hence it is important to redefine better ways of partnerships with the countries. Rather than concentrating on the issue of oil for security, the United States should look for means of showing commitment to the Gulf States (Kefferputz, 2010). There is a need to create new modes of leverage in the region, more so ways to support the efforts of developing alternative energy, increasing energy efficiency and tackling rising domestic energy demands. The United States and the Arabian Gulf economic relationship should grow beyond energy dependence so as to create a suitable atmosphere for other sectors. The United States should prioritize its relationship with her North American counterparts such as Canada and Mexico. There is a need to exploit the regional benefits that will accrue from the shale revolution to reverse comparative neglect and boost investments on how best it can be and the energy economies of the countries can be integrated. For instance, lifting the ban on crude oils will benefit Mexico and Canada that have been frustrated before by the policy. Approval of infrastructure construction across the border will be beneficial for the countries ensuring both countries benefit from the energy arrangement within NAFTA context. Conclusion The shale revolution has had a considerable impact both economically and environmentally, drawing a lot of opposition from various key players especially in Europe. The discussion is viciously growing, and the debate coincides with skepticisms over the levels of technically available shale gas resources. Projections indicate that the levels may be lower than estimated before. Similarly, there is increased realization that replicating the technology in other areas especially in Europe is proving to be difficult. The implications of the revolution are slowly being appreciated globally as its main effect has been on the global gas markets. The shale revolution has created a surplus of liquefied natural gas putting the downward pressure on the gas prices which has significant economic changes. However, uncertainties regarding the future of shale gas still are yet to be addressed. The big issue though lies on how the revolution can translate into actual dependable gas production. If the revolution turns out to be stable source, then there are projections that by 2030, the globe will float on cheap gas. The shale revolution took everyone by surprise, that is, key players in the industry and energy policy makers. There are vast benefits though associated with the shale gas revolution and to realize the benefits adequately, a pro-active attitude is required, as well as readiness to revisit and revise the various approaches and set policies about the venture. Reference List Aguilera, R. F. & Radetzki, M. (2013). Shale Gas And Oil: Fundamentally Changing Global Energy Markets. Oil and gas journal, 111(12), 54-61. Boersma, T. & Johnson, C. (2012). The Shale Gas Revolution: US and EU Policy and Research Agendas. Review of Policy Research, 29(4), 570-576. Foss, M. M. (2011). The Outlook for US Gas Prices in 2020: Henry Hub at $3 Or $10? Retrieved from http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/12/NG_58.pdf. Hou, Z. et al. (2014). The Development Implications of the Fracking Revolution. Retrieved from http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8886.pdf. Hughes, J. D. (2013). Energy: A Reality Check On The Shale Revolution. 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