Title

US Energy Revolution:_x000b_ Effects on Global Oil Prices

Department

Economics, Finance, & Quantitative Analysis

Document Type

Article

Publication Date

4-1-2015

Abstract

This presentation discusses the impact of the US energy revolution on the global oil prices and the US economy itself. This so-called energy revolution is about extracting tight oil by the use of unconventional technologies and methods from the ground. Tight Oil, Shale Oil, or Light Tight Oil (LTO) is crude oil contained in formations of low permeability from which conventional wells can produce oil, but only at very low and uneconomic rates. However, by combining unconventional hydraulic fracturing and horizontal drilling, or “fracking”, technologies on a massive scale it became possible for the US to increase its oil and gas output dramatically in a short span of time. Indeed, today the US is the largest producer of crude oil followed by Saudi Arabia and Russia. In addition, improvements in energy usage and structural changes resulted in lower energy intensity and thus higher efficiency and productivity throughout the economy. Historically, the use of fracking can be traced back to the 1930’s and 1940’s but, hydraulic fracturing had not been utilized on a large scale until early 2000’s, when energy companies began actively expanding crude oil and natural gas exploration with an emphasis in shale formations. This industrial expansion was aided by a landmark study conducted by the EPA in 2004 which found that fracking posed no threat to underground drinking water supplies. Following the EPA’s study, hydraulic fracturing became exempted from the Safe Drinking Water Act by the Bush administration in the Energy Policy Act of 2005. Supply and Demand Analysis is used to explain the dramatic decline in oil prices experienced in the last year. Supply factors are highlighted that tie together the new ”fracking” technology and the massive increase in oil supply. Demand factors are analyzed to explain both the current decline in oil use and the potential demand for oil in the future. Lastly, market forces are examined in order to project the long-term trajectory for the price of oil.

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