American Shale Gas and Tight Oil: Reshaping the Global Energy Balance

The development of shale gas and tight oil in the United States constitutes an "unconventional revolution," owing to its scale and speed. It is already having a profound global impact: upending energy markets, reshaping competitiveness in the world economy, and portending major shifts in global politics.

The unconventional revolution was born out of advances in two technologies. Hydraulic fracturing - or "fracking" - was introduced at the end of the 1940s. Efforts to apply this technique to dense shale in Texas began in the early 1980s. But it took two decades to perfect the combination of fracking and horizontal drilling that would drive the new boom. And it wasn't until 2008 that these techniques began to have a major impact.

Since then, however, growth has been remarkable. Shale gas currently accounts for nearly half of U.S. natural gas production, and U.S. prices have fallen to one third of European levels and one-fifth of Asian levels. Tight oil, produced with the same techniques as shale gas, has led to a 60 percent rise in U.S. oil production since 2008. This increase of three million barrels per day is larger than the national output of nine of the 13 OPEC countries. The International Energy Agency predicts that the U.S. will soon overtake Saudi Arabia and Russia as the world's largest oil producer.

Until recently, it was expected that America would be importing large amounts of liquefied natural gas (LNG) to make up for anticipated shortfalls in domestic production. Billions were invested over the past decade to develop new LNG capacity. But with America awash in inexpensive domestic gas, some of that LNG is now going to Europe, introducing unexpected competition for traditional suppliers Russia and Norway. In the aftermath of the 2011 Fukushima disaster, some of that LNG is also being used for electricity generation in Japan, making up for that nation's shutdown of nuclear power.

The unconventional revolution has caused many countries to reassess their energy policies. China has prioritized development of its own gas resources; replacing coal with natural gas for power generation there could also reduce air pollution. India, burdened with a growing import bill for oil and gas, is considering unconventional gas as well. One of the reasons for Mexico's historic reform of its energy sector is the scale of what is happening next door in Texas. And Britain sees shale gas development as a way to boost employment.

American shale gas is also changing the balance of competitiveness in the world economy. Inexpensive gas is fueling a U.S. manufacturing renaissance, as companies build new plants and expand existing facilities. European industrial leaders watch with alarm at their firms' loss of competitiveness to U.S. factories using low-cost natural gas. This is a particular worry in Germany, where exports account for half of GDP and energy costs remain on a stubbornly upward trajectory. European countries will likely reconsider aspects of their high-cost energy strategies or face further erosion of competitiveness and more job losses.

Tight oil has already demonstrated its geopolitical significance. Iran's move toward a nuclear agreement might not have happened without tight oil. When sanctions were imposed on Iranian exports, many feared world oil prices would spike and the sanctions would fail, due to insufficient alternative supply. But the increase in U.S. oil production over the past two years, along with increased Saudi output, has enabled the world oil market to weather the missing Iranian exports. This combination allowed the sanctions to stay in place and pressured Iran to the negotiating table.

In Arab capitals, anxiety mounts that increasing domestic oil production will fuel wholesale U.S. disengagement from the Middle East. Such fears overestimate the extent to which direct oil imports shape U.S. engagement. Rising domestic output, combined with greater automotive fuel efficiency, will certainly continue to reduce U.S. oil imports. Yet the U.S. will still import oil in the years ahead, with more of it coming from Canada.

But even before the growth of tight oil, the Persian Gulf provided only about 10 percent of U.S. supply. What drove U.S. strategy in the region was oil's overall importance to the global economy and world politics. In the future, Middle Eastern oil will remain essential to the functioning of the world economy. This means the region will long be of central geopolitical importance to the U.S.

The shale energy revolution provides a new source of resilience and enhances America's position in the world. The emergence of American shale gas and tight oil demonstrates, once again, a lesson that is learned and relearned - how technological innovation can reshape the balance of global economic and political power.

This blog will carry more about the unconventional revolution and the global energy industry from IHS Energy CERAWEEK over the coming weeks with additional CERAWeek tweets daily in early March.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.