Energy in the Next 20 Years, How Shale Gas is Changing the Landscape.

Cars have formed an intrinsic part of our living and it would be hard to imagine life without them. They have driven progression to the next frontier yet there lies a further problematic issue which the future holds. How do we find more sustainable energy sources to abate our ever increasing consumption of motor vehicles and their demands of fuels needed to drive them?

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The fact of the matter is fossil fuels are a non-renewable resource, once they have been used they cannot be replaced. As the worldwide economy’s start joining the global trend of urbanisation there is an increasing reliance of oil. It also doesn't help that the majority of the oil production comes from nations who belong to OPEC (Organisation of Petroleum Exporting Countries) who have an openly collusive agreement to control the supply of oil being released into the markets which have dire consequences on the price levels.

However as time has gone by innovated countries have taken it in their stride and produced technologies which allow the consumer to drive further distances at the same amount of fuel consumption. In other parts of the world there has been large sums of money gone into researching the viability of electric cars.   

Recently there has been quite a debate around the next possible solution to the energy crisis. Hydraulic Fracturing: the process whereby shale gas is extracted from rock beds underground and brought to the surface. This gas in turn goes through a process whereby it is refined and then converted into petroleum. 

Various environmental issues have been presented in objection to this and it has certainly got policymakers scratching their heads. One of the first countries to begin this process is the United States of America which has set down a goal of becoming petroleum independent by 2020.

The U.S is the largest consumer of oil in the world and has been for many years. Due to their lack of crude oil supplies they have become oil dependent and because the use of this fuel is one of the factors which drives their economy and contributor to large trade deficits.

These developments have led to some interesting trends emerging. Let’s first see how the price of Brent Crude Oil has done in these markets.

It seems as if the price of Brent has been subdued over the last 2 years. It’s formed a triangle shape which could break out either way. Going back to the highs of 2008 we are noticing a long term trend where there are a series of lower highs which could shift the likelihood to the downside.

  

Let’s now see US Crude Oil Productions

Towards the end of 2011 we see the beginning of a production drive in crude oil in the U.S and that trend has continued for the last 3 years. Shale gas has helped tremendously to bring down the U.S consumers reliance on oil imports. This is one of the reasons we may be seeing a stronger dollar.

But let’s step back for a minute and look at this from a longer term point of view.

This is the same chart as above just on a longer horizon from 1950 to present. We know that OPEC was formed in 1960 and in this period we saw an increase in U.S crude oil production as the government tried to fight off the price effects of the new monopoly supplier. This ran into the early 70’s where we see a peak in production. It was at this time where there was an oil embargo declared as a result of a war.

Governments around the world implemented fuel restrictions reduced the number of oil consuming power stations and even cut down the speed on highways so they could curb the demand on petroleum. 

This lasted until the 1980’s when the price of oil had skyrocketed, there was little demand at the price levels for which it stood. This created an oil glut which prompted the prices to dramatically drop and from the chart above we see that the crude oil production started decreasing and would descend for the next 25 years.

Then came the 2008 Financial Crisis where the price of Brent crude oil peaked at $147 a barrel only to tumble back down to below $40 in a matter of months. This once again sparked debate amongst American policymakers, a debate which was started more than 50 years ago. How do we sustain our energy usage?

We see current production has reached levels last seen in the late 1980’s early 1990’s and in a short span of time can only signal one thing. The U.S means business when it says it wants to become crude oil dependent. As new drilling plants are built and more shale gas brought to the surface we will begin to see a surge in the production rate again.

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There are a few things which the above analysis does present. One is that this is not the first time the U.S has tried to fight off OPEC’s dominance on worldwide oil supply. The U.S sees this dominance as a tool to hold the world to ransom when a political issue arises.

The next point is that from the previous attempt we can see there was a short term effect when production increased however that didn't last long. Seeing the evolution of how we manufacture petroleum in the future one seriously needs to question whether the direction the U.S is headed is the best one.

As stated previously there have been environmental issues related to fracking, issues which may not necessarily take effect now but much later in the future. One only needs to look at the B.P oil spill in the Gulf of Mexico. Although it was an accident the damaged has been done cannot be reversible.

In conclusion the world needs a long term energy solution and the more political wrangling that lays around the slower the process takes. What we need to realize is that our sources of energy are depleting at alarming rate and we don’t want to be stuck in a compromising position where we are left with nothing. 

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