The Economist front-page article (6 December, 2014) shows how the economics of oil have changed with the "shale revolution" in America and other countries. Another Economist front-pager of 17 January 2015 flags up what an era of low energy prices can do to fix bad energy policies and politics.
The backdrop is what is proving to be a long-term massive drop in oil (and gas) prices all around. This should be good news for economic growth except for major producers of fossil fuels. Click here
Saudi Arabia's refusal to reduce production to prop up prices may be a ploy to nip the shale competition in the bud. According to some analysts, this may also be a disguised lethal weapon (in collusion with the United States) to wreck Russia's economy as what actually happened in 1985 leading to the collapse of the former USSR.
China's recent energy deals with Russia are largely for reasons of the Middle Kingdom's energy security and geopolitical balancing against America's "Asia Pivot". They do not alter the reality that China is rapidly shifting her energy mix towards a higher proportion of renewables and nuclear energy. Click here
The Economist has flagged up the front-loaded depletion of shale wells with 60-70% of total production coming within the first year of operation. So a continuous stream of revenue and investment is essential by having to drill more and more wells. It begs the question how many shale operators could cope with a massive drop of oil prices from $115 a barrel in June to near $46 a barrel at present, below the average floor price of $48 a barrel for shale production viability. Click here
Apart from the question whether global demand will increase in sufficient magnitute in the coming decades to sustain the shale euphoria, the extensive environmental impact of fracking in terms of ground water and soil pollution may rear its ugly head at some point causing such public outcry as to dim its future prospects. Click here
What is more, it seems that another financial crisis could be just around the corner, this time to be sparked off by an "energy bubble". Click here
This is no sheer conjecture because -
(a) There is too much hype financed by junk bonds offering high interest yields. As oil and gas prices continue to be subdued, and as more and more new and less profitable drilling needs to be made, a tipping point may suddenly happen, as in the case of an unstable but grand-looking sand castle.
(b) The world's major oil and gas consumers, especially China, are all trying hard to enhance energy security through energy conservation and reducing and/or diversifying imports.The momentum is builing up in China towards a greater share of near-zero-emission energies like solar, wind, hydro and nuclear power. While the demand remains substantial, the rate of growth in imports is likely to slow down.
(c) In addition, as the world's largest energy consumer, China is re-structuring her economy to becoming less energy-intensive (from a value-added perspective) and more sustainable (from an environmental perspective). This will dampen oil and gas prices further.
While much lower energy prices will benefit most economies, particularly those heavily dependent on energy input such as China, before the Age of Oil comes to an end, the transition is likely to be fraught with uncertainties including geopolitics and shale-gas "irrational exuberance".
As energy prices and production are closely interlocked wih the world''s financial and investment matrix, the bursting of a global "energy bubble" could well spark off the next global financial crisis from which few countries could escape unscathed.