spreading an energy revolution

http://www.nytimes.com/2013/02/06/opinion/global/spreading-an-energy-revolution.html?_r=1&

Spreading an Energy Revolution
By CHRISTOF RÜHL
Published: February 5, 2013

ONLY two or three years ago, consensus was building among pundits that we had reached peak oil, that the fossil fuel industry was in its dotage and that the world would suffer repeated energy price shocks in the transition to a post-fossil fuel economy. Many people in the oil industry were skeptical of this dire prognosis, and the extraordinary recent expansion of unconventional gas and oil production in North America proved the optimists to be correct.

What many fail to recognize, however, is that North America’s oil and gas renaissance, which has the potential to fuel a U.S. industrial recovery with cheaper energy, is not a happy accident of geology and lucky drilling. The dramatic rise in shale-gas extraction and the tight-oil revolution (mostly crude oil that is found in shale deposits) happened in the United States and Canada because open access, sound government policy, stable property rights and the incentive offered by market pricing unleashed the skills of good engineers.

Last year, in BP’s Energy Outlook 2030, we hailed the prospect of North American energy self-sufficiency. With the incentive of high oil prices and the application to oil of drilling techniques mastered for shale gas, we now estimate that tight oil will account for almost half of the 16 million barrel per day increase in the world’s oil output by 2030. Almost two thirds of the new oil will come from the Americas, mainly U.S. tight oil and oil sands from Canada. The United States is likely to surpass Saudi Arabia in daily output very soon, and non-OPEC production will dominate global supply growth over the coming decade.

Policy, not geology, is driving the extraordinary turn of events that is boosting America’s oil industry. East Asia boasts shale and tight-oil resources greater than those of the United States. Latin America and Africa too have very substantial endowments. However, the competitive environment, government policy and available infrastructure mean that North America will dominate the production of shale gas and tight oil for some time to come.

Markets play a dual role in changing the landscape. A decade of high prices spurred on the technological change that is now restoring North America’s energy crown. And the same market forces are promoting efficiency and curtailing energy demand in countries where the price mechanism is allowed to do its job. Consumption of liquid fuel among member countries of the Organization for Economic Cooperation and Development will continue to fall and be overtaken in 2014 by demand from emerging market nations, where fuel prices are still often subsidized.

One consequence, not often discussed, is the impact of these changes on today’s oil market. The tight-oil revolution poses a challenge to the OPEC nations and their national oil companies. We predict that all of the additional oil supplied to the market over the next decade will come from unconventional sources outside OPEC.

The expected surge of new oil will lead to increased supply overall and continued market volatility. If history is any guide, OPEC will cut production and forego market share in favor of price stability. But as so often before, its policy response and its ability and willingness to manage spare capacity will be crucial in determining market conditions in the medium and longer term.

In the 1980s, oil from the North Sea and Alaska transformed the market. Today, market-led innovation has brought us to a crossroads again, and the time has come to make critical decisions about energy. Nations with abundant resources must decide whether to follow the path of open markets, including foreign access and competitive pricing. Alternatively, they can opt for restrictive investment regimes that risk becoming less rewarding.

Communities must decide whether the carbon-reducing benefit of using natural gas in power generation outweighs the fear of new drilling technologies. Europe too must grasp the market nettle. Without a clear signal that carbon has a price, European power utilities will be charmed by the cheapness of coal, increasingly available thanks to America’s embrace of shale gas.

A surge in shale gas and tight-oil production is transforming our energy landscape. Forecasts of its potential differ widely. What is certain, however, is that our energy future is not wholly at the mercy of geology. The speed at which we can bring this useful resource to market will depend to a great extent on issues that will be decided by our governments, in our parliaments and in our town halls.

Christof Rühl is the group chief economist of BP.