“Depletion, in the sense of inadequate resources … is a chimera”, say Roberto Aguilera and Marian Radetzki in their new book, The Price of Oil.
This is not a book about the politics and personalities of the oil industry. And despite the title, it is only partly about the oil price – what determines prices or what they may be in the future. Instead, building on their earlier work on global oil resources, the two economists paint an optimistic picture for expansion of global oil production over the next 20 years – and conversely a gloomy one for oil prices, companies and exporting countries.
The book, published in November, is divided into three parts. In the first, Aguilera and Radetzki argue that neither the actions of Opec, nor the depletion of oil resources, nor high Chinese demand can explain rising prices.
Yet there is clearly something unusual about oil: from 1970 to 2013, its price rose by 886 per cent, while that of minerals and metals increased 68 per cent. They blame this on inefficient state ownership and the negative effect of oil on national development.
The second part is their most original contribution, and really the key part of the book’s argument. They extrapolate from the success of shale oil production in the US, which went essentially from zero to more than 5 million barrels per day in less than a decade. Arguing that the same techniques can be applied worldwide, they say, “Global exploration for shale oil resources has barely begun”.
In their view, this means abundant supply at a long-term price of just $40 to $60 per barrel.
This part, though, would have benefited from more geological background. With the effects of the low price now playing out, the authors could also have talked more about how resilient shale oil production will prove, whether it will really spread quickly to other countries while the industry is slashing investment, and whether Opec countries’ strategy of protecting market share will squeeze out shale, at least for now.
Finally, they conclude by considering the effect of their scenario on the global economy, environment and politics. On the panic over “peak oil” – the supposedly inevitable and imminent decline in global oil supplies – they say, “These scares … created more widespread confusion by also influencing serious oil producers and public policymakers”.
Indeed, the chief executive of US major Chevron had said as recently as March 2014, just before the price crash, that “$100 a barrel is becoming the new $20”.
Robin Mills reveals more insights from Roberto Aguilera and Marian Radetzki’s new book, The Price of Oil:
What is shale oil?
Shale oil is extracted from rocks of low permeability by drilling horizontally into them and fracturing them with high-pressure water, sand and some chemicals to create cracks that allow the oil to flow out. Shale has doubled US oil production over the past decade. This technique can also be used to revive mature, supposedly depleted conventional oilfields, whether in North America or anywhere else, including the Middle East. The rise of shale oil is one illustration of the authors’ contention that: “History demonstrates forcefully that, in practical terms, ‘exhaustible’ resources are in fact not exhaustible at all.”
What are the global effects of Aguilera and Radetzki’s foreseen surge of production?
They remind us that long-term oil price forecasts go up and down almost with the daily whims of the market. Indeed, policymakers in oil-dependent countries should heed their warning: “It would be an utterly boring view of the future … that stuck exclusively to the conventions of the day.” Even if long-term low oil prices are not certain, they are certainly a scenario to plan for. Low oil prices may diminish US interest and outside interference in the Middle East, and make it harder to tackle climate change, but at the same time boost the global economy.
Who should read this book?
Oil industry professionals, energy executives and policymakers will benefit from a robust challenge to conventional wisdom about future oil supply. A lesson of the shale oil revolution anyone can benefit from is that, “Human inventiveness is an exceedingly strong force”.