conventional wisdom…

In recent years pre=shale oil),conventional wisdom about world oil supplies has been dominated by several ideas:

–that world oil production is at, or near a peak (Wikipedia has a good summary

–that steadily increasing demand will be generated by nations like China and India (when three billion Asians trade in bicycles for motorcycles, and then motorcycles for cars…), leading to sharp price increases

–the continuing pivotal role of OPEC–despite members’ competing national agendas–both in supplying oil to the rest of the world, and in asserting the rights of the oil-producing nations to be fully paid for selling their principal asset to the rest of the world

–the (oversimplified) asymmetry between major industrial oil consuming nations, which–ex the US–have little petroleum output of their own, and producing nations, with not much going for them economically other than oil

–the central role of the US, the largest and most profligate oil consumer in the world, in moving D-day for a supply crisis closer to the present.  Two powerful special interest groups, Big Oil and Big Autos, have forged a unique alliance to block the (demand-lowering, government spending-funding) taxation of oil and oil products that is the norm elsewhere.

Less talked about, but still important, is the activity of  hydrocarbon “national champions: in places like China and Japan.  These are firms, some publicly traded, whose main mission is to secure oil supplies for delivery to the home country in times of shortage.  To them, profits are a distant second to getting control of barrels.

Other forms of planning for the upcoming shortage have been high up on the political agendas of most countries (ex the US) for years.  The development of nuclear power generation is one prominent example.

…may be turned on its head,

in two ways:

1.  The situation of the US, as the glutton at the world energy table, is changing.  It’s not that we’re consuming less.  It’s that, thanks to shale oil, domestic oil production is beginning to increase.  Also, the extremely low relative price of domestic natural gas, thanks to shale gas (tomorrow’s topic) is prompting users who can do so to switch from oil to gas.  The shale revolution is also beginning to get foreign oil users to relocate plants to the US so they, too, can use cheap gas as a feedstock.

2.  The shale oil/gas business is so new that no one knows yet what deposits may lie within the borders of large European or Asian oil-consuming nations.  These may also be very large, although natural gas recovery faces the distribution infrastructure issues I outlined yesterday.

consequences

There are certainly geopolitical implications as/if the asymmetry between petroleum producers and petroleum users shifts.  If/as that happens, will the Middle East be as important in politics?  Probably not.

Commodities speculation based on the idea of ever-rising oil prices may abate.

Alternate energy, particularly forms requiring large government subsidies, may lose investment appeal.

The oil industry itself may shift further away from the idea of Indiana Jones-like exploration for mammoth new oilfields toward the profit calculations of pocket protector-equipped mining engineers assessing recovery prospects from well-mapped shale prospects.  This probably favors smaller companies over larger ones.

Energy exploration and development firms with marginal success rates, whose main appeal is therefore their leverage to rising energy prices, become (even) more speculative than before.