A shale oil and gas revolution will lower energy costs,rearrange global geopolitical equations
The external value of the rupee sinks ever lower,reflecting at least partly the continuing trade deficit. Indian exports simply cannot keep pace with the ever growing demand for imports. An important component of the total import bill is on account of crude oil imports. Unfortunately,in the foreseeable future,there does not seem to be much hope of being able to reduce oil imports while the demand for energy must inevitable go up with a rising GDP, there is little chance of any large increase in domestic production of petroleum.
Fortunately,the international oil market is on the brink of a dramatic transformation. What has been labelled the shale oil and gas revolution,involving the extraction of oil and gas from the organically rich mineral called oil shale,promises to be beneficial to all but a handful of countries. This promises to add vast amounts of oil and gas reserves to the current provable reserves,and will surely ensure that global oil prices remain relatively low.
Indeed,the numbers being quoted in various official and semi-official documents are truly mind-boggling. For instance,the International Energy Agency (IEA)estimate,based on data from 41 countries,suggests that shale gas will increase the worlds potential reserves of gas by 47 per cent. The increase in world reserves of crude oil is a less dramatic but still significant 11 per cent. And even these figures could be gross underestimates because some countries have not been included in these estimates. Moreover,improvements in extraction technology may also help increase both oil and gas reserves.
As a matter of fact,it is precisely technological progress that has brought about the shale revolution. As recently as 2011,some departments of the US government questioned whether the extraction of shale oil was commercially viable. However,the threat of increasing dependence on crude oil imports and that too from countries that are typically not favourably disposed towards Western countries obviously provided strong incentives to explore alternative sources of energy. This essentially political reason was reinforced by an economic one the global demand for crude oil has increased several fold partly due the spectacular rate of growth achieved in China,but there has not been any commensurate increase in supply. So,oil prices have naturally increased quite sharply.
Thanks largely to tax incentives,the US oil industry has been in the forefront of efforts to extract shale oil. It has pioneered new technologies such as horizontal drilling and hydraulic fracturing,commonly known as fracking,which involves the fracturing of rock by means of pressurised liquids. These new technologies have made the extraction process commercially viable,and have made the US the dominant player in the shale revolution. The IEA estimates that the US will,in a few years time,become a net exporter of energy,a far cry from the current situation where it imports a sizeable fraction of its crude oil requirements.
The increase in global oil and gas supply could not have come at a better time. It has ensured that energy prices remain in check. Hopefully,stable and reasonable crude oil prices will ensure that the recovery from the global recession will come sooner than later. Of course,if and when the major economies such as the US,China,Japan and the eurozone countries recover,their demand for energy will also increase significantly,since their economies perhaps with the exception of China are very energy-intensive.
However,there are strong possibilities that other countries will challenge the dominance of the US by playing a more active role in the shale revolution because they too will have to confront the problems posed by rising energy costs. Estimates of the geographical distribution of shale oil reserves suggest that several countries do have large reserves. In fact,Russia,which is the second largest producer of oil from conventional reserves,also has the largest shale reserves in Siberia. Argentina and Algeria are some of the other countries with significant reserves. Further improvements in extraction technology will surely enable these countries to join the club of shale oil and gas producers.
This geographical spread has an important geopolitical implication. The larger the number of oil-producing and exporting countries,the larger must be the size of any cartel controlling a significant fraction of global oil supply. Since it is more difficult to get a large number of countries to unite after all,they are likely to have very different goals and objectives that transcend their common interest in the oil market it is unlikely that groups like OPEC can cause sudden disruptions in global oil supply. This is particularly important for developing countries like India,since they are obviously more vulnerable to fluctuations in oil prices.
The Indian effort in exploiting non-conventional sources of energy has focused mainly on solar energy and wind turbines. However,the existing technologies in these areas are still relatively undeveloped so that the final cost of energy through these sources turns out to be quite high. Since it is also a costly proposition to develop new technologies,it makes sense to free-ride on the efforts of other countries. The success of the shale revolution may result in countries,such as the US and Russia,focusing resources on the development of better technologies in shale oil extraction,perhaps by diverting resources away from development of technologies in other forms of non-conventional sources of energy. This suggests that India too should think seriously about exploring shale deposits that exist in some regions,such as Assam,Rajasthan and some coastal areas.
The shale revolution does have its detractors,all of whom are concerned with its implications for the environment. Strong lobbies have been created to ban fracking,since they fear that the injection of vast quantities of water,gas and various chemicals can cause a significant increase in environmental pollution. While this school of protesters draw a direct causation between environmental pollution and shale oil extraction,other protesters have a more sophisticated argument against the shale revolution. They contend that if energy costs are driven down because of the success of the shale revolution,then countries will cease efforts to develop cleaner and less energy-intensive technology. And so the continued use of dirtier technology will result in more pollution. Given the widespread desire for lowering energy costs,this argument is unlikely to find a large number of supporters.
The writer is professor,Department of Economics,University of Warwick,UK