While the debate regarding when oil prices will start to pick up again continues, The Telegraph released a report shedding light on how we managed to get into this state in the first place. Turns out that US shale-oil production is largely to blame for the series of events that led to a full-scale crisis within the industry. Here’s how:
Fracking is a method used to extract oil from shale formations, which has become increasingly popular over recent years. The practice calls for the use of hydraulic fracturing, which is how the term ‘fracking’ was coined. In terms of comparison to traditional oiling techniques, fracking is a much cheaper and more flexible option, enabling almost immediate alteration of production efforts if needed.
The introduction of a new way to acquire oil reserves without importing suddenly empowered the US, not to mention an abrupt influx of oil supplies on the market. Following the discovery and sudden utilisation of a large number of shale oil formations across the states, supply very quickly outgrew demand, leading to a price drop of more than 70% in just 18 months.
Energy expert and founder of IHS Cambridge Energy Research, Daniel Yergin, summed up how fracking managed to find a position of prevalence over traditional methods at the World Economic Forum:
“It takes $10 (billion) and five to ten years to launch a deep-water project. It takes $10 (million) and just 20 days to drill for shale.”
That’s not to say that the shale oil industry hasn’t felt the sting of the price drop. The industry is expecting to have to deal soon with bankruptcies and large-scale layoffs due to dwindling profits. The fact that they can produce oil so much quicker and cheaper than other methods, however, will put them in a winning position when things do start to pick up again.
Deputy Director of the International Monetary Fund, Zhu Min, claims that not only did fracking shift the power of the global market, but that its influence will continue to keep oil prices on the low side for the foreseeable future:
“Shale has become the swing producer. Opec has clearly lost its monopoly power and can only set a bottom for prices. As soon as the price rises, shale will come back on and push it down again.”