Opinion: Fracking boom could finally cap myth of peak oil

The U.S. oil market could be on the verge of its own fracking revolution, similar to what the natural-gas market is already experiencing. As a result, domestic production is now projected to rise significantly over the coming decades, reducing the relative share of imports in U.S. oil consumption.

Advances in horizontal drilling and hydrofracking, in which highly pressurized liquids are injected into underground rock, have been used increasingly over the past few years to extract natural gas. The result has been a substantial increase in recoverable reserves — accompanied by a lot of controversy over fracking’s environmental effects — and an associated decline in the cost of natural gas.

In late 2007, wellhead prices for natural gas were hovering in the range of $6 to $7 per thousand cubic feet; by late 2011, they had declined to $3 to $4, and they have fallen further since. John Deutch, a former director of the Central Intelligence Agency, has written that, given the impact on energy markets and therefore geopolitical dynamics, “it is perhaps a permissible exaggeration to claim a natural-gas revolution.”

The same controversial technologies used to recover natural gas from deep-rock formations are now increasingly being used to extract oil. Oil is already being produced from shale at several locations throughout the U.S., most notably the Bakken shale in North Dakota.

As Jim Mulva, the chief executive officer of ConocoPhillips, recently said, “The revolution has spread to domestic oil production. And it may track the path it followed with natural gas. We just don’t know yet. But it looks promising.”

Rising Domestic Oil

The federal Energy Information Administration certainly thinks so. An early release of its annual energy outlook projects a substantial increase in onshore production of oil from shale formations — what experts call “tight oil.”

In 2010, oil companies produced 5.5 million barrels per day of domestic crude. The Energy Information Administration estimates that figure will rise to 6.7 million barrels per day by 2020, mostly because of “continued development of tight oil, in combination with the ongoing development of offshore resources in the Gulf of Mexico.” The U.S. has not produced as much as 6.7 million barrels per day since 1994.

The mirror image of this projected increase in U.S. production of oil and natural gas is a decline in reliance on imports. In 2005 and 2006, about 60 percent of the liquid fuel used in the U.S. was imported. By 2010, that share fell to 50 percent, and it continues to decline. The Energy Information Agency expects it to drop to 37 percent by 2035.

Other analysts believe that even this projection is too conservative because tight-oil production could rise faster than expected. Every time projections are revised, the numbers seem to move higher.

So, will this push oil prices down overall, as shale gas has done to natural-gas prices? For years, analysts have worried that known oil reserves have peaked, so that prices will keep rising. Tight oil could change that dynamic. As the energy analyst Seth Kleinman, a colleague of mine at Citigroup Inc., argues, the price effects of the shift to tight oil “may be more immediate and subtle than the supply-and-demand balances hint at.”

The year ahead, he says, “could really see the death of the peak-oil hypothesis, something that has been underpinning a lot of the structural bullishness on oil.” (The terminology is thus borderline ironic, since tight oil could make oil markets much less tight.)

Still, significant uncertainty surrounds the entire fracking movement, for both natural gas and oil. The environmental controversies — especially regarding water pollution — are not yet as prominent for oil as for natural gas, but that’s undoubtedly because tight-oil production is only now ramping up. If it grows to be as large as projected, there’s little doubt that environmental concerns will become much more prominent, too.

Expect to hear a lot more about tight oil over the next few years — and not just from the Energy Information Administration.

(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

8 Comments

  1. GeoJonsi

    This does not dispel the myth of peak oil, which simply states that just as an individual well or field someday peaks in the volume of oil that can be produced from it annually, and will eventually decline, so will a basin, a mature oil producing country, and eventually the world. It is true that most estimates of peak oil were based on conventional oil, which is widely regarded by the same authorities cited in this article to have peaked. Even with all the unconventional tight oil, it is not expected for the US to produce more than the 1970 conventional peak, no matter what policies are enacted or how much we drill baby drill. Tight oil is good news: providing quality employment and access to some stable supply over the coming decades and possibly stable but medium prices at the pump. But it does not dispel peak oil. All fields, basins, and regions eventually will decline below their maximum production. The questions are when, and by how much. Considering Citigroup was engaged in commodity and housing speculation and was guilty of fraud in the latter, I’m not going to trust their opinion, because they have demonstrated their willingness to lie to the public for their own gain.

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  2. Dollar

    fracing is only controversial for idiots.

    Anybody with half a brain knows this is a phony issue.

    The people behind the opposition to fracing, and who keep it financed and stirred up, oppose the KeystoneXL for the same reason. That being, they are anti-fossil fuel.

    There’s no substantive reason to oppose fracing or KeystoneXL on their merits.

    Everytime I read the adjective ” controversial ” next to fracing, I just shake my head in disbelief that so many people can not think for themselves.

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  3. Dino

    Dollar is right on! Agree 100%

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  4. tony

    It’s FRACING not FRACKING when are you idiots in the media going to get this term right. It’s not that difficult.

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  5. Mike

    I would have absolutely no issues with “fracing” or KeystoneXL if it can be proven, bona fide, that safety for the public and protection for the environment are going to be 110% top priority. So far, I’m not convinced that they are.

    Would you feel good about an oil pipeline running right down the middle of Lake Livingston????

    #5
  6. David Gower

    You could add the word “controversial” next to “drinking water” and some of these fools will eventually start protesting “drinking water”. Idiots!

    #6
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  8. Doug

    Worldwide crude and condensate production has been at 74 MMBOPD +/- for 6 years now. It takes 4-5 MMBOPD/year to offset natural decline. This article state the U.S. will increase by 1.2 MMBOPD over the next 8 years; for an average of 0.15 MMBOPD/year; less than 4% of what we need to maintain the current plateau. Where is the other 96% supposed to come from?

    #8