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Shale Oil: Savior Or Another Flash In The Pan?

With the U.S. shale oil boom in full swing energy independence looks to be closer than ever, but how long will it last? Not everyone is on board with America’s newfound oil.

Though some experts, like the Institute of Mechanical Engineers, have projected that the world’s oil reserves may only last for another four decades, new methods of oil extraction–namely hydraulic fracturing–have bolstered production unexpectedly, leaving some to champion oil’s second-coming.

Such cutting edge extraction methods have proven useful in fueling the United State’s oil production in the short term, but they have also proven extremely expensive.

According to NPR a barrel of “fracked” oil costs, on average, about $62 to produce, as opposed to onshore middle east crude oil which costs only an average of about $24. With current oil prices at around $50 per barrel shale oil will finally be put to the test.

So, the questions remains: Will these new extraction methods breath new life into oil production? Or are they just another flash in the pan?

Peak oil

The idea of peak oil has long been a part of the public consciousness. Coined by M. King Hubbert in 1965, the theory dictates the following:

“Peak oil is the day that oil production reaches [its] maximum, and will subsequently begin to decline until full depletion is ultimately reached.” – Investopedia

Hubbert’s theory is dictated primarily by the idea that oil is a finite resource, and by his projections a production peak will be followed by a period of terminal decline. For the major part of peak oil’s existence (since 1965) the theory had proven to be ominously true–that is, until 2009.

Peak oil’s validity continued all the way into the new millenium, until the shale gas boom. Fueled by advances in hydraulic fracturing that allowed oil companies to extract crude oil from formerly inaccessible rock layers, U.S. oil has experienced a major rebirth.

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image from U.S. Energy Information Administration shows another oil peak in 2009

The shale boom has carried forward into today’s market culminating in a production rate of about 8.3 million barrels per day in the first half of 2014 alone.

So is this the well of energy independence that America has been looking for? Some aren’t so optimistic.

The economics

The benefits of American shale oil could be enormous. Because of the shift, the U.S. has reached its highest level of oil production in the past 30 years and has consequently lifted an export ban which could boost U.S. oil exports up to a million barrels by per day by the end of the year.

Some have posited that if the price per barrel hovers at around $60, it could save consumers a monstrous $150 billion per year, and drive the economy forward.

Skeptics, however, are unconvinced of lasting prosperity. A new study released in the international science magazine Nature, along with naysayers at The Post Carbon Institute warn that shale oil (as well as natural gas) are just hot air.

Some common arguments against shale include:

The cost

If oil prices continue to fall as they have been recently, it may make hydraulic fracking financially infeasible for drillers in North Dakota and Texas where most of the U.S. shale oil comes from.

Currently, such companies are already taking on extremely risky amounts of debt to remain profitable.

Supply may be smaller than we think

Former estimates of shale gas tacking on another 10 percent of the world’s crude total were found to be overestimated by a whopping 96 percent.

This overestimation centered around the Monterey shale reserves located in California, which were formerly projected to produce about 15 billion barrels of oil, and are now estimated to hold only about 600 million.

Projections of one of one of the biggest shale formations in the U.S.–the Bakken formation in North Dakota–hover around 20 billion barrels, over 1 billion of which have already been extracted.

These projections, however, should be taken with a grain of salt, because as Bloomberg reports they’re often exaggerated by oil companies who use their own research to assert such claims.

The takeaway

Even in the face of plummeting oil prices, U.S. shale oil has showed no signs of slowing. This, however, does not mean the U.S. is wholly committed to shale oil entirely.

The rise of electric cars, increased government spending on renewable energy, and commitment to curb carbon emissions will all likely impact the new oil boom.

For now, consumers can enjoy low gas prices–at least for how long they might last.

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James Pero