In an unexpected stroke of good luck for you, me and the country, the price of crude oil has fallen from $115 a barrel in June all the way down to $84. This has meant cheaper petrol and diesel, and a lower subsidy bill for the Government. One big factor responsible for this price fall is the unexpected increase in oil produced from shale in the US.
What is it?
Shale oil is essentially crude oil but an unconventional one at that. While the conventional fuel is usually found in porous rocks such as sandstone, shale oil is trapped in shale rock formations that are not easily permeable and hence is tougher to tap. So though its existence has been known for long, shale oil wasn’t being extracted in large quantities.
But technological advancements — horizontal drilling and fracturing (fracking) — introduced and honed since the early part of the century have enabled shale oil exploration and production on an industrial scale.
Most of the action in shale oil so far has been in the US where explorers have struck copious quantities of the black gold. It has not been smooth sailing though. Environmentalists and local communities have been up in arms against the pollution caused to land and water bodies by the chemicals used in the fracking process.
Nevertheless, shale oil produced in the country has grown by leaps and bounds over the years. So the dependence of the US — the largest oil consumer in the world — on imported crude oil has fallen sharply. And this has added to the weakness of global crude oil price in recent months.
Conventional crude oil producers such as Saudi Arabia have been cutting prices to maintain their market share and to drive some of the high cost shale oil producers out of action.
But whether this will have the desired effect remains to be seen — technological improvements are expected to push down the cost of shale oil production.
Also, while Saudi Arabia might have the financial muscle to sustain low prices for quite some time, other conventional producers such as Venezuela and Nigeria may likely find it difficult to hold out.
Why is it important?
Shale oil has the potential to be a massive game-changer in global energy supply and pricing — with enormous geopolitical implications. It’s not just the US; countries such as Russia, China and Argentina are also believed to have vast stores of shale oil. India too is taking baby steps to find and explore its shale assets potential.
Progress in other nations has been quite slow so far. But there’s no saying when the inflection point will be reached. If production continues to expand, countries such as the US could start exporting oil in a few years.
Why should I care?
For starters, more shale oil means lower petrol and diesel prices. So you spend less on travel.
Cheaper crude oil also reduces India’s current account deficit and subsidy bill and will also give a boost to the country’s GDP — that means more and better-paying jobs, and more profitable businesses. But shale oil production in India in the future could also mean more environmental challenges. So the right trade-off needs to be made.
