The Impact of Shale Drilling on World Energy Markets

November 15, 2013 By

June 5, 2013

by David Hackett

Who would have thought three or four years ago that natural gas and crude oil production in the U.S. would grow to the point of tipping the energy supply balance around the globe? According to the Wall Street Journal, cheap natural gas in the U.S. has resulted in lower energy prices in Bulgaria. As well, African members of OPEC are concerned about the loss of crude oil market share in North America. Expert observers credit these concerns with the increase in crude oil production in North America.

Everyone is aware of the debate around fracking, short for hydraulic fracturing, the technique to fracture deep shale formations to unlock natural gas and crude oil. Not everyone, however, is aware that fracking has resulted in huge increases in natural gas production and crude oil production, primarily in the Mid Continent of North America. U.S. natural gas reserves are now at levels last seen in the 1970’s. The country is about to transition from an importer of natural gas to an exporter.

The Wall Street Journal explains that cheap natural gas in the U.S. has displaced coal for the generation of electricity. This has reduced the price of U.S. coal so much that European electricity generators dependent on Russian natural gas used the bargain basement price to negotiate a better deal. Natural gas outside of North America is priced relative to an alternative, crude oil. Once the Europeans realized that cheap U.S. coal provided an alternative to the major suplier, Russia’s Gazprom, they were able to negotiate lower prices for their natural gas supply. While no U.S. gas moved to Bulgaria, the impact of fracking was felt in Sofia.

On the crude oil side, North American refiners in Atlantic Canada, the U.S. Mid Atlantic, and on the U.S. Gulf Coast are being supplied by light sweet crude oil produced via fracking and moved by rail and tanker to these markets from the Mid Continent. Production from the Bakken and Eagle Ford zones has displaced imports of light sweet crude from West Africa by a wide margin. In 2007 the three largest West African crude producers, Algeria, Angola, and Nigeria, imported 2,132 kbd of light sweet crude to the U.S. In 2012 that number dropped to 918 kbd. Due to the drop in revenue, West African members of OPEC have argued for a cut in production to prop up oil prices. However, OPEC members have recently chosen to leave the output target unchanged, taking a wait and see approach to the issue.

So what does this mean to the U.S. consumer? Since gasoline is traded around the world, its price is generally set by the price of worldwide crude benchmark, Brent. If you have followed our Bubble Map over the last 15 months, you can see that the spread between Brent and WTI has fallen from $20 per barrel to less than $10 per barrel. The decrease in the spread has resulted from improved logsitics (lower transportation costs) from the production fields of North Dakota and Texas to the coastal refineries, increasing the available supply to the rest of the world from African crudes priced off of Brent. Gasoline prices are generally lower now than a year ago. While the difference is not dramatic, we believe that the increase in crude oil supply from North America has taken the steam out of worldwide transportation fuel prices, resulting in lower gasoline prices for consumers.