Interpreting Middle East Economic News and Analyzing Market Trends

US shale ‘revolution’ over-hyped as Saudi Arabia considers getting in the game

Source: Global Research

Not a week goes by without another exciting story about the shale revolution taking place in the US and how it’s going to change the world.  There is also talk of the US becoming in independent for the first time in decades.  However, a closer look at this revolution and you will see that it’s all hype.


The idea of an energy-independent United States—thanks to a revolution in the way North American shale is harvested—is reigniting vociferous debate about what it could mean for global markets, and especially the oil-rich Gulf states of the Arabian Peninsula.

“Reduced demand for oil from the US could undermine the oil price globally, thereby placing pressure on regional budgets which are increasingly reliant on the price of oil staying firm,” Tim Fox, chief economist at Emirates NBD, Dubai’s largest bank, explained to CNBC.

A downside pressure on prices would arguably come at an unfortunate time for countries like Saudi Arabia, still the world’s top oil exporter, where government spending has risen in order to help keep the turmoil affecting the broader Middle East from hitting the country domestically. Saudi Arabia’s budget is directly linked to the global price of oil.

The degree and timing of any problems for the Gulf States are hard to pin down. The American shift to shale, described by many analysts as a game-changer, will take time. Experts reiterated to CNBC that current technologies in place at many US refineries were designed to process heavier types of crude. Furthermore, new innovations with regard to shale will eventually spread to other parts of the world as well.

“The US is just one player in the oil market. Other countries will follow, including Saudi Arabia, which will probably increase their reserves as well,” Fahad Al Turki, head of research at Riyadh-based Jadwa Investment, told CNBC.

Jadwa Investment believes that even if prices were to soften, Saudi Arabia has plenty of breathing space. Saudi Arabia and many of its oil-exporting neighbors need a global oil price of about $74 a barrel in order to keep meeting their budget demands. Brent crude was trading just above $100 on Wednesday.

But with OPEC members Algeria and Iran already calling for cuts in output, the issue becomes whether the Kingdom should bring its leverage as a swing producer to bear early, rather than later.

“Certainly, adjustments to oil output might be one way to react,” Fox pointed out. “Given that US oil self-sufficiency is still likely to be a number of years away—estimates are 10-15 years— it is hard to prejudge the exact circumstances that might apply at that time”.

Read the full story from CNBC.


Shale has been such a buzzword lately that even Saudi Arabia is looking to get into the game.


Saudi Arabia, the world’s biggest oil exporter, will drill about seven test wells for shale gas this year, according to Oil Minister Ali Al-Naimi.

“We know where the areas are,” Al-Naimi said at the Credit Suisse Asian Investment conference in Hong Kong today. “We have rough estimates of over 600 trillion cubic feet of unconventional and shale gas, so the potential is very huge and we plan to exploit it.”

Saudi Arabia is seeking to develop its natural gas resources to meet rising domestic energy demand. Saudi Arabian Oil Co., or Saudi Aramco, is searching for shale gas in the northwest of the country and exploring for unconventional resources such as sour gas in the oil-rich eastern region and in the Empty Quarter deserts, Senior Vice President of Upstream Amin Nasser told a conference March 10 in Manama.

Read the full story from Bloomberg.


The truth is, much of the shale revolution is hype and will fail to materialize the way it’s been sold to the public at the moment.  If shale were a game-changer, then why is the number of rigs (drilling rigs that search and drill the wells) at a low?  See here for details.  Why is US employment in oil and gas relatively flat?  Shouldn’t it be rising fast?


A good read on the shale hype is The Fracked-up USA Shale Gas Bubble.  One of the author’s conclusions is that the shale hype is merely another Wall Street game to make quick money, something the Street is very good at.  In the end, it will leave a lot of investors holding an empty bag.


There are other things to consider when deciding whether or not the US shale play is a game-changer (besides environmental issues):


1. Shale oil and gas takes a lot of water (and chemicals) to be pumped into the ground.  How will this affect water resources and water allocation to people and farms, which sit right in the middle of the shale region?


2. Consider shale plays in the Middle East.  Saudi Arabia might be looking into shale but it’s biggest problem is water.  Where is Saudi Arabia going to get water to pump into the ground?  Sea water?  Sure, but that also requires a long pipeline to be built to transport the water.  Fresh water is out of the question.


3. Shale oil and gas takes a more energy to pump out, produce and transport.  A barrel of oil from shale, for example, takes more energy to pump out and covert than Saudi oil.  Therefore, there is more ‘net energy‘ leftover to sell and use in conventional oil than in shale. 


4.  Over the past few decades, net energy has been declining, which is bad for everyone and shale is much less efficient than conventional oil adding to this trend.


5.  The fact that Saudi Arabia is looking into extracting natural gas from shale is merely another sign that the easy oil and gas days are over. From now on, we can expect to pay more to produce fossil energy and get less in return.  This has been the trend.


6.  The quickest way to see US shale oil and gas production come to a halt is if prices collapsed like they did in 2008; oil went from over $140/bbl to $36/bbl in a matter of months.  As an example, if oil were to fall below $60/bbl, some suggest below $70/bbl, much of the shale oil production would have to stop because the production cost is above that.


For now it seems that investment bankers are the biggest supporter of shale oil and gas because it’s finding new suckers every day to invest in this over-hyped story.  Yes, shale production is on the rise, but there are so many other factors to consider before predicting an end to energy dependence.