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.
This has contributed to a massive drop in oil (and gas) prices all around, which 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.
In the same breath, The Economist flags 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 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 $70 a barrel at present, the floor price of $50 a barrel for shale production viability notwithstanding. Click here
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 renewales and nuclear energy. Click here
Apart from the question whether there is enough sustained global demand in the coming decades to sustain the shale euphoria, the extensive environmental impact of fracking operations in terms of ground water and soil pollution is likely to rear its ugly head at some point causing such a huge public outcry as to dim their future prospects. Click here
What is more, it begs the question whether another financial crisis could be just around the corner, this time sparked off by an "energy bubble". Click here
This is no 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 manage energy security by reducing and/or diversifying imports. While the demand remains substantial, the rate of growth in imports is likely to slow down.
(c) Apart from energy security, as the world's largest energy consumer, China is re-structuring her economy to become less energy-intensive (from a value-added perspective) and more sustainable (from an environmental perspective). This will dampen oil and gas prices further.
Thus the transition from the Age of Oil is fraught with uncertainties including Cold War geopolitics and massive shale gas "irrational exuberance". The resultant "energy bubble" could well spark off the next global financial crisis.