The energy business may enter a tumultuous period in 2014, even if sanctions on Iranian oil exports remain in place. The combination of increased shale drilling, cheaper solar power and higher investments in energy efficiency has the potential to create a glut of oil from countries outside the OPEC producers’ cartel at current prices. A sharp drop in the oil price is possible, and more volatility in oil prices, energy investments and geopolitics is almost inevitable.
Prolific American shale drilling is already changing the global petroleum map. The International Energy Agency (IEA), a rich-country oil club, expects the United States to overtake Saudi Arabia as the world’s biggest crude producer by 2015. By 2035, the world’s biggest economy may be self-sufficient in petroleum. The gains for the country are substantial, as domestic production with a cost of $40 to $80 a barrel replaces imports at something like the global Brent benchmark of $112 a barrel.
Analysts have consistently underestimated shale’s US potential and they’re probably still underestimating the size of the global revolution. For example, the IEA’s latest long-term forecast estimates that production from shale and other “light tight oil” will hit only about 6 million barrels per day by 2030. That is about 6 percent of global supplies, but the combined production from would-be shale powers Russia, China and Argentina would only be about a fifth of that of the United States.
The caution is based on a belief in American energy exceptionalism. Other countries with big unconventional deposits, it is believed, lack entrepreneurs, friendly regulators and so forth. And there’s no guarantee that drilling techniques developed in North Dakota or Texas will work in other hotspots.
But shale wannabes have strong economic and political incentives to overcome such hurdles. US factories today are paying about a quarter what European and Asian rivals pay for their energy. Consultant IHS estimates the shale boom could add $3,500 to the average American’s disposable income by 2025. There are also the geopolitical benefits of not relying on Middle Eastern oil.
Political resistance may slow down shale in Western Europe, but the governments of Russia and China are not likely to let the opportunity pass. It might take time, but a global shale boom could emerge just as US production growth reaches a plateau, probably sometime in the mid-2020s.
Shale is not the only technological revolution that could confound conservative forecasts. Installed solar capacity is growing rapidly. Admittedly, it’s off a low base, and helped by generous government subsidies. But the unsubsidised cost of solar panels has plunged by more than three-quarters since 2008. Utility-scale solar power is now economically efficient - without subsidies - in the sunnier parts of Europe. If costs stay on their downward trajectory, as seems likely, installations could continue to exceed forecasts.
Meanwhile, after a decade of high energy prices, interest in saving energy is heating up. European Union member states will begin to implement the bloc’s latest efficiency directive in 2014. In the United States, the Obama administration has tightened auto efficiency rules and recently announced plans to curb pollution from power plants - developments that are bearish for greenhouse gas emissions and oil. For fast-growing, resource-constrained countries like India and China, it makes more economic sense to invest in energy efficiency than to import foreign fuel.
Investors understand each of these trends, but they probably underestimate the effect of their convergence. The consequences could be profound.
To start, crude could be in persistent oversupply. The excess would only increase if recent trouble spots like Iran, Libya and Iraq were able to push up production. OPEC’s swing producer, Saudi Arabia, might have to cut production sharply to keep prices above $100 a barrel.
Longer term, if the Saudis are unwilling to keep bearing the brunt of forgone production, or if the shale revolution spreads, oil prices might become more vulnerable to a sudden collapse. That would be good for users, but potentially destabilising for producers that rely on pricey crude to make government budgets work.
Energy investments - particularly those like ultra-deepwater or Arctic oil, which require high oil prices to break even - would become riskier, and more complicated. Conversely, climate change could become less of a political issue if cheap solar panels and unexpected strides in energy efficiency lead greenhouse gas emissions to peak sooner than expected, taking some of the urgency out of the hunt for cleaner-burning fuels.
Rapid technological change has a way of up-ending forecasts rooted in historical trends. In 2014 and beyond, energy market participants should expect the unexpected.