Quantitative E¤ects of the Shale oil revolution on Oil
Prices
Cristiana Manescu
Galo Nuño
European Central Bank
Oslo - June 2014
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Introduction
Motivation
What is the shale oil revolution?
Oil markets have recently undergone a signi…cant transformation with the unexpected rise in the
US production of shale (light, tight) oil
The combination of horizontal drilling techniques together with hydraulic
fracturing and rising oil prices have made the exploration and exploitation of
large volumes of shale oil possible.
The production of shale oil is so far very much concentrated to the US
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Introduction
Motivation
Signi…cant expansion in US production
US shale-oil production is expected to reach 4 mb/d by 2018 according to EIA
Figure: United States oil production by type (in mb/d, EIA Scenario)
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Introduction
Aim of the paper
This presentation: which is the oil price impact of the
shale oil revolution?
We propose an analytical exercise employing a DSGE
Quantitative assessment under di¤erent production scenarios.
A critical issue is the behavior of Saudi Arabia
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Saudi Arabia and the oil market
Why is Saudi Arabia so relevant?
“OPEC is Saudi Arabia”
– Mabro (1975)
“The Saudis have acted as what they are:
the leading …rm in the world oil market”
– Adelman (1995)
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Saudi Arabia and the oil market
Saudi Arabia is not a price-taker in the oil market
Saudi Arabia is the world’s largest oil exporter and owns the largest known oil
…elds
Saudi Arabia is the only producer which “shuts in” signi…cant spare capacity
(Smith, 2009)
Saudi Arabia’s oil output has been highly volatile despite the lack of domestic
shocks
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Saudi Arabia and the oil market
Saudi Arabia maintains ample spare capacity
Spare capacity of the four major OPEC producers. In million barrels per day
3.5
Saudi Arabia
Iran
Iraq
Venezuela
3
2.5
2
1.5
1
0.5
0
2000
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2002
2004
2006
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2008
2010
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Saudi Arabia and the oil market
Saudi Arabia’s oil output has been highly volatile ...
Market shares of the four major OPEC producers. Individual production over world production
0.2
Saudi Arabia
Iran
Iraq
Venezuela
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
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1975
1980
1985
1990
1995
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2000
2005
2010
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Saudi Arabia and the oil market
... even if the Kingdom has been an “island of stability”
Instances when Saudi production was directly a¤ected by exogenous events
1977 …re at the Abqaiq facilities
1984 several Saudi tankers destroyed during the Iran-Iraq war
1991 attacks by Iraqi missiles during the Gulf war
“O¢ cial Oil Market Chronology”
– U.S. Energy Information Administration
Apart from these episodes, changes in Saudi oil output were the result of
production decisions; not the consequence of disruptions in its production
capabilities
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DSGE model
Overview
We employ the DSGE model from Nakov and Nuño
“Saudi Arabia and the Oil Market”(Economic Journal, 2014)
Saudi Arabia is a dominant …rm, with the rest of oil producers as a
competitive fringe (Dynamic Stackelberg game)
The behavior of the dominant …rm can be seen as a pro…t maximizing
response
Spare capacity allows fast adjustment of output as necessary in response to
demand and supply shocks
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DSGE model
Overview
The model in a nutshell
Three regions: one oil-importing and two oil-exporting ones
The oil-importer uses oil in consumption (gasoline)
Oil is a homogeneous commodity supplied by two types of producers: a
dominant …rm and a “competitive fringe”
The fringe takes the oil price as given
The dominant producer faces a downward sloping “residual demand” curve,
picking pro…t-maximizing points
No borrowing across regions and abstract from monetary and exchange rate
factors)
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DSGE model
Model performance
The model is able to replicate the main stylized facts of
the market
Data and model standard deviations*
Data
Model
High elasticity
Low elasticity
Oil
price
8.5
8.1
8.3
Oil
output
1.6
2.2
1.2
Fringe
output
1.5
3.3
1.7
Saudi
output
6.6
6.5
6.4
*Standard deviations, in percentage points, of …rst log di¤erences.
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DSGE model
Model performance
The volatility in the dominant supplier is consistent with
the response of a monopolist
Impulse responses to a supply and a demand shock
Total oil output
Oil price
GDP of importing region
6
8
6
4
6
4
2
4
2
0
2
-2
0
20
40
0
0
0
Fringe oil output
20
40
Dominant producer share
5
-2
0
20
40
Consumption of importing region
4
1.5
1
2
0
0.5
-5
0
20
40
Dominant producer oil output
8
6
0
0
0
20
40
Dominant producer investment
15
20
40
Shock process
2
-2
5
2
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0
0
10
4
0
-2
0
20
Months
40
0
-4
0
20
Months
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40
-6
Supply shock
Demand shock
0
20
Months
40
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DSGE model
Model performance
Event study: the Persian Gulf war of 1990-91
The model explains the dynamics of Saudi Arabia production (only 1 shock: fringe supply)
Fringe oil production
Saudi oil production
60
11
Million barrels per day
Million barrels per day
10
55
50
45
1990.5
1991
1991.5
9
8
7
6
5
4
1992
1990.5
Total oil production
60
1990.5
1991
date
1991.5
1992
30
Constant USD
Million barrels per day
1992
40
Data
High elasticity
Low elasticity
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1991.5
Real oil price
65
55
1991
20
10
0
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1990.5
1991
date
1991.5
1992
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Scenarios
We consider three scenarios
Anticipated shocks
1
Baseline scenario: shale oil production in the US increases from roughly
zero in 2010 to 2.7 mb/d in 2014 and reaches a peak of 4 mb/d in 2018.
Data from EIA May 2014
1
2
Current law and regulations a¤ecting the energy sector remain in place
throughout the projection horizon.
Production of shale oil remains concentrated in the US and does not extend
signi…cantly to other countries before 2020.
2
Lower shale production scenario: political, technical or environmental
constraints limit US shale production which remains broadly ‡at across the
period 2014-2018.
3
Higher shale production scenario: technological progress, political will and
economic incentives push up US shale production, which reaches 6 mb/d by
the end of the decade
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Results
Quantitative e¤ects of the shale oil revolution
Di¤erential e¤ect of di¤erent oil shale production scenarios
Shale oil production
Oil price difference
6
-2
USD per barrel
5
mbd
4
3
2
1
0
2014
baseline
higher shale production
lower shale production
2015
2016
2017
-4
-6
-8
-10
2014
2018
World oil production difference
2017
2018
-0.5
2.5
-1
2
-1.5
mbd
mbd
2016
Saudi Arabia production difference
3
1.5
1
0.5
2014
2015
-2
-2.5
2015
2016
2017
2018
-3
2014
2015
2016
2017
2018
Figure: Di¤erential e¤ect of di¤erent oil shale production scenarios All the …gures
represent di¤erences compared to the counterfactual scenario of no shale production
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Results
Quantitative e¤ects of the shale oil revolution
Take away
1
Most of the shale oil revolution is already priced in.
2
Even considerable changes in the scale of the production will have only a
small e¤ect on prices.
1
The oil price impact of the increase in supply under the di¤erent scenarios by
2018 amounts to changes of less than USD4 per barrel. This is small
compared to the average oil price volatility.
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Results
Shale oil supply and Saudi Arabia’s reaction
What if Saudi Arabia deviates from its optimal rule?
Saudi Arabia lowers its production in order to partially o¤set the increase in global supply
However, Saudi Arabia can deviate from its pro…t-maximizing path and
instead maintain or even increase production.
This would preserve its oil revenues and may push shale oil producers o¤ the
market.
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Results
Shale oil supply and Saudi Arabia’s reaction
Are there similarities with the 3rd oil shock of the
mid-1980s?
Saudi Arabia maximizing revenues instead of pro…ts
Total oil production and oil prices
(monthly absolute di¤erences with
respect Jan 1981)
Manescu & Nuño (ECB)
Saudi Arabia oil production and oil
revenues (monthly data changes)
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Results
Shale oil supply and Saudi Arabia’s reaction
We analyze the case of Saudi Arabia maximizing revenues
instead of pro…ts
In an alternative scenario
The pro…t maximizing scenario corresponds to the higher shale production
scenario above (worst-case).
Alternative scenario (revenue scenario): Saudi Arabia deviates from the
pro…t-maximizing path by keeping approximately constant its revenues (since
the end of 2013).
Commitment of Saudi Arabia to defend its revenues is public information: the
rest of agents in the economy are aware of it since 2013 and may form
expectations (and take actions) accordingly
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Results
Shale oil supply and Saudi Arabia’s reaction
The impact on prices is still moderate
Less than USD1 pb by 2018
Shale oil production
Oil price difference
-5
USD per barrel
4.5
mbd
4
3.5
3
2.5
2014
2015
2016
2017
-5.5
-6
-6.5
2014
2018
World oil production difference
baseline
revenue scenario
2015
2016
2017
2018
Saudi Arabia production difference
-1
1.9
mbd
mbd
1.8
1.7
-1.5
1.6
1.5
2014
2015
2016
2017
2018
-2
2014
2015
2016
2017
2018
Figure: Di¤erential e¤ect of alternative Saudi Arabia production scenarios All the …gures
represent di¤erences compared to the counterfactual scenario of no shale production.
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Results
Shale oil supply and Saudi Arabia’s reaction
Saudi Arabia’s pro…ts would su¤fer in this case
Due to the increase in costs
Revenue difference
Market share
11
% World oil supply
Million USD per day
-120
-140
-160
-180
-200
2014
2015
2016
2017
10.5
10
9.5
9
2014
2018
Profit per barrel difference
2016
2017
2018
2
% of GDP (2012)
USD per barrel
2015
Profit difference
5
0
-5
-10
2014
baseline
revenue scenario
2015
2016
2017
2018
0
-2
-4
2014
2015
2016
2017
2018
Figure: Domestic e¤ect of alternative Saudi Arabia production scenarios.
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Conclusions
Conclusions
The shale oil revolution may have a major role in the US economy, but its
impact on the oil market is expected to be moderate.
Numerical estimates using a DSGE model suggest that it has produced a fall
in prices of USD5 per barrel, already priced in.
Looking forward, di¤erent scenarios by 2018 imply changes of less than
USD4 per barrel.
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