This Friday OPEC meets in Vienna. The elephant in the room is the very visible impact of America’s shale fields on world oil markets. The technologies that have unleashed U.S. shale hydrocarbons have resulted in the fastest growth in oil production in a century.
The problem OPEC faces is guessing just how fast America’s shale technology will still improve, and thus drive costs down to unlock yet more oil at today’s lower prices. Consider what has already happened.
In 2014, America’s oil production grew by 1.2 million barrels per day (MMbd)—the greatest single-year increase since the oil age began more than a century ago. Over the past half-dozen years, U.S. oil output rose by a total of 4 MMbd, with most of the growth in the past three years.
The last time so much oil was added in such a short period to world markets was in 1986, when Saudi Arabia—which then enjoyed far greater spare capacity than it now does—made a strategic decision to increase output by 3 MMbd. That flood of oil drove global prices down to $20 per barrel (2014 USD). This time the plunge in prices was caused not by a foreign oil monarchy but by thousands of American entrepreneurs drilling on state and private lands.
And the American oil gusher was not the result of new “discoveries” but from the maturation of technologies that have blown past the heavily subsidized solar, wind, and battery domains.
Measured in terms of energy output per unit of capital cost for the energy-producing hardware, EIA data shows that the effectiveness of shale technology has improved about 500 percent during the past five years. And this is the average, including data for the poor and average not just the best performers. Imagine what happens as tomorrow’s average migrates towards today’s best.
Meanwhile, over the same period and measured the same way, the efficiency gains for wind turbines, solar cells, and lithium batteries have also improved, but far less spectacularly.
Furthermore, efficiency gains in alternative-energy technologies are slowing, while shale tech shows no sign of a slow-down. (For more on these realities see my recently released Shale 2.0 – Technology & the Coming Big-Data Revolution in America’s Shale Oil Fields.)
America’s shale companies now produce more oil with two rigs than they did just a few year ago with three rigs. At $55/barrel, at least one of the big players in the Texas Eagle Ford shale reports a 70 percent financial rate of return. If world prices rise slightly, to $65/barrel, some of the more efficient shale oil operators today would enjoy a higher rate of return than when oil stood at $95/barrel in 2012.
This piece originally appeared in Forbes.com