Shale Oil Production in the USA, Free Essay for Your Inspiration

Published: 2022-03-23
Shale Oil Production in the USA, Free Essay for Your Inspiration
Type of paper:  Essay
Categories:  Economics Energy
Pages: 7
Wordcount: 1902 words
16 min read

Advancements in technology have seen the United States surpass countries such as Saudi Arabia and Russia to become the world's largest producer of oil (Financial Times, 2018). This comes as a relief especially because it is estimated that the consumption of oil is expected to triple by the year 2035 (Cooper, Stamford, & Azapagic, 2016). In previous times, crude oil prices have been seen to fluctuate from time to time which has pushed countries such as the USA to explore other options such as shale oil. Extraction of shale oil is very expensive which explains why only the United States has ventured into its extraction. The extraction of conventional oil on the other hand is cheap which has empowered OPEC and other oil-producing countries. Increased shale oil production has shaken up world oil markets and forced oil-producing countries to make adjustments in output. However, the various environmental concerns associated with its production have discouraged many countries from extracting it. In my opinion, even though the United States is the world's largest oil producer, it still does not enjoy a competitive advantage because the extraction of shale oil is more expensive than the extraction of conventional oil.

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Impact of shale oil production on the world Environment

The extraction of shale oil has been shown to bring dangerous metals such as mercury onto the surface and cause harm to people. There is also the issue of contamination of groundwater. Its extraction has also been associated with earthquakes. This is because the oil is usually extracted from deep ground levels after extensive drilling and hydraulic fracturing. OPEC countries use the pipe and pump method to extract their oil which does not endanger the environment as much as shale oil extraction does. European countries have banned its exploration and extraction citing environmental concerns. Nelsen (2016) reports that the failure of shale oil production in Europe is due to contextual differences. He adds that Europe has a higher population density than most regions and therefore the extraction of the shale oil cannot take place. Environmental concerns are the main reasons why shale oil extraction cannot take place in Europe. Europe has higher environmental standards compared to other regions. In most of the developed countries, renewable energy sources do not meet the required demands and often have to substituted by the non-renewable sources. In case the prices of oil go up, other developed countries will be forced to consider the exploration of shale oil. Shale oil will be explored majorly because it can help meet the energy needs of a country due to its large-scale production. Renewable sources of energy will be ignored even more because countries would be focused on meeting their energy needs. The production of shale oil is being opposed in different countries. Nelsen (2016) states that fracking has been associated with increased global temperatures. Researchers have stated that ever since the United States started experiencing a boom in the shale oil industry, there has been an increase in methane emissions. If more and more countries started the production of shale oil, then the global environment stands to suffer. The environment in different countries would be destroyed, and different places would become susceptible to earthquakes.

Impact of shale oil production on the World Political Economy

Financial Times (2018) reports that the increased production of shale oil by the United States has constrained OPEC's ability to manipulate prices. It is also reported that the United States has now attained new power to use sanctions for influence. In the event that Canada joins the USA in the production of shale oil, would oil prices would be further shaken and OPEC would have to adjust its output accordingly (Hill & McKaig, 2014). However, if OPEC and other oil-producing countries fail to adjust their output, oil prices would fall and shale oil-producing countries such as Canada and USA could go out of business because they cannot produce the oil when world oil prices are low. Financial Times (2018) reports that such an incident occurred in 2014 because OPEC refused to adjust its output which led to a drastic fall in oil prices and a majority of US oil companies had to go out of business. In the short-term, other oil-producing countries will experience a short-term decline in revenue from oil exports as the United States produces a majority of the oil consumed in the country. However, it is important to note that the demand for oil in the United States is so large that it is difficult to attain complete energy security. Even with soaring production of shale oil, the United States will still need to import some oil even though the purchases from other countries have fallen sharply (Financial Times, 2018). Kilian (2015) reports that the United States was the largest producer of oil in the world in the year 1973/1974, but it still could not meet its national needs and had to supplement the shale oil with imported crude oil. Soaring shale oil exploration will have a minimal impact on international trade for oil-producing countries because the countries have devised means of dealing with increased production from the United States. OPEC countries hold a considerable percentage of oil reserves, and therefore the decisions they reach to have a huge impact on the oil market. One of the main aims of the bloc is to maintain the stability of oil prices. Traditionally, the recommended price per barrel is 65$ (Kilian, 2015). In instances where the prices drop below the recommended level, the OPEC countries simply reduce the production of oil until the prices are stabilized. These countries only produce enough oil to sustain the recommended prices. For example, at the moment, with the United States engaging in the vigorous production of shale oil, the OPEC countries have reduced their production of crude oil to ensure the supply is kept at the recommended level. A similar incidence occurred in 2014 when OPEC decided to cut its output due to increased production from the United States (Financial Times, 2018). Several companies went out of business following the move. It can, therefore, be safely assumed that OPEC and other oil producing countries still wield considerable power regarding the prices of oil in the world market. The traditional features of the oil market are still superior compared to the new ones. Shale oil exploration is not very sustainable. The prices of crude oil control the industry. If the prices of crude oil fall below certain levels, the shale oil industry cannot be sustained. This is one of the main reasons why other oil-producing countries will not be adversely affected by the increased production of shale oil by the United States. The price of crude oil went up in 2003 which prompted most of the countries with shale oil reserves to explore the option as it cost competitive. However, venturing into shale oil exploration is not viable nor sustainable because, in the event of the prices falling, the industry will be brought to its knees. Shale oil can therefore not be depended on entirely. There are more reasons why the political economies of oil producing countries will be less affected. The United States may have become a victim of its success. Its continued and increased production of shale oil caused the worldwide prices of crude oil to drop significantly in the year 2014. This decline can easily force them out of business. The other reason for little impact on other oil producing countries is that shale oil is not a perfect substitute for conventional crude oil. Oil is normally graded based on two properties; its Sulphur content and its density. While shale oil is made up light sweet crude, conventional crude oil is made up of ultra-light sweet crude (Cunningham, 2018). These differences create minor functional differences between the two. If the prices of oil go up forcing many other countries to venture into shale oil production, the immediate effect would be the falling of global prices of oil due to the increased demand. Countries with fewer energy demands will be able to meet all their energy needs. However, the production of shale oil by itself is not affordable to many countries. Only the developed countries can engage in its production. There are different ways which the production of shale oil can influence the global environment. First of all, previous trade relations will be interrupted due to the increased production. It is no secret that the United States has established relations with other oil-producing countries in the Middle East because previously, the United States was a large consumer of oil from these countries. However, with the new exploration ventures, the nature of some of these relationships will have to change. The United States might cut ties with some of countries completely.

Impact of shale oil production on National Competitive Advantage of USA

Even though the United States employs very advanced technology to produce shale oil, the extraction is still expensive compared to conventional methods. Oil-producing countries making up the OPEC bloc will continue to enjoy a competitive advantage because they have huge crude oil reserves which can be extracted cheaply. However, even though the extraction of conventional oil is cheaper, conventional oil projects take many years before being established. Shale oil extraction, on the other hand, takes only a few weeks which makes shale oil extraction better suited to respond to market needs (Financial Times, 2018). I also believe the US enjoys some form of competitive advantage because of the fact that it is the only country with the technical know-how and financial ability to produce shale oil at the moment. Competitive advantage is the ability to produce a given good or service cheaper than ones competitors. Crude oil extraction in Saudi Arabia is very cheap. The country can sometimes produce oil for as cheap as 10$ per barrel (Cunningham, 2018). There are countries that can produce oil at 20$ per barrel. These countries can produce their oil this cheaply because of the use of the pipe and pump production method. Many of these countries also engage in offshore drilling which is advantageous in many aspects. The extraction of shale oil costs between 60-90$ per barrel (Beattie, 2018).This is expensive, and therefore shale oil extraction is only viable in instances where the oil prices go up. During times when oil prices are below 40$ a barrel, shale oil extraction is not economically viable. As long as a cheaper way of shale oil extraction is not reached, countries using the conventional means of oil production will continue to enjoy a competitive advantage. All these factors make the countries that produce conventional oil to have a competitive advantage over the ones which engage in shale oil extraction. As much as it is cheaper to produce crude oil conventionally, other oil-producing countries should not depend very much on this fact because shale oil producers have employed a lot of technological know-how to enable them to produce shale oil in more cost-effective ways. Hampton (2018) states that shale producers have already overcome serious challenges and surpassed a lot of expectations. OPEC had previously tried to sink shale oil production by oversupplying its oil to markets, but the shale oil producers were not driven out of the industry. The shale producers were only able to maintain their place in the industry because they employed cost-cutting measures and used newer and more efficient drilling technology. I believe other oil-producing countries should also focus on increasing the efficiency of their production process to increase their revenue earnings. In November 2016, the prices of crude oil f...

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