For the time being, therefore, the evolution of the US price of oil is inextricably tied to improvements in the US refining, pipeline, and rail infrastructure

Why Shale Oil Isn't Driving Down 

Global Oil Prices

by LUTZ KILIAN

It may seem that the rapid decline in the global price of oil after mid-2014 may be attributable to sharp increases in US shale oil production, providing direct evidence of the impact of the US shale oil revolution on oil prices.

Becasue shale oil is not being exported, it replaces US crude oil imports, reducing the demand for oil in global markets, as do US exports of refined products. Some observers have gone as far as suggesting that shale oil may have become a victim of its own success in that it caused a sharp drop in global oil prices.

There is no credible support for this interpretation. Similar price declines also occurred in other industrial commodity markets at the same time, suggesting that the cause of the oil price decline has not been specific to the oil sector, but that it mainly reflects a weakening global economy in Asia as well as Europe, possibly amplified by the decision of many oil producers to preserve oil revenues by increasing oil production in response to falling oil prices. This view is also consistent with the comparatively small magnitude of US shale oil production on a global scale.

Where this idea came from

Only a few years ago, many observers expected a steadily growing global shortage of crude oil. This shortage did not materialize in part because of the rapidly growing production of shale oil in the US.

The production of shale oil (also referred to as tight oil) exploits technological advances in drilling. It involves horizontal drilling and the hydraulic fracturing (or fracking) of underground rock formations containing deposits of crude oil that are trapped within the rock.

This process is used to extract crude oil that would have been impossible to release by conventional drilling methods designed for extracting oil from permeable rock formations. Shale oil production relies on the availability of suitable drilling rigs and skilled labour, which is one of the reasons why the US shale oil boom so far has been difficult to replicate in other countries.

US shale oil production has grown from about 0.4 million barrels a day in 2007 to more than 4 million barrels a day in 2014. This expansion was stimulated by the high price of crude oil after 2003, which made the application of these new drilling technologies cost competitive. The expansion of US shale oil production soon captured the imagination of policymakers and industry analysts.

By 2012, the International Energy Agency projected that the US would become the world’s leading crude oil producer, overtaking Saudi Arabia by the mid-2020s and evolving into a net oil exporter by 2030 (International Energy Agency 2012).

Pundits envisioned the US becoming independent of oil imports, net oil exports financing the US non-oil trade deficit, and consumers enjoying an era of cheap gasoline with a resulting rebirth of US manufacturing.

My recent research, however, suggests that these visions remain far removed from reality (Kilian 2014).

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