Will fracking lead to cheap oil for all? Not necessarily
Ceteris paribus. Always with the ceteris paribus.
FT Alphaville's Kate Mackenzie has an excerpt of a very interesting research note from energy consultant Phil Verleger. The bulk of the note is a look back at the apparent vindication of MIT economist Morris Adelman, who rejected the ideas of "peak oil" at the time when they were most fashionable. Adelman, Verleger writes, accurately surmised that technological advances would mean the total reserves are far less predictable than a narrative of rising prices and increasing scarcity would imply.
But Mackenzie picks out the surprising twist in Verleger's note. While he, like so many others, points to the massive change wrought on the global energy market by the invention of fracking and other techniques for extracting unconventional reserves, he doesn't see that as leading to a predictable fall in prices. While a glut of unconventional oil would be good enough to depress prices, it couldn't simply replace the traditional OPEC countries. And the way they would deal with that squeeze could have strong repercussions:
Periods of low oil prices will undermine existing governments in nations such as Russia, Kuwait, Iraq, Algeria, Nigeria, Iran, United Arab Emirates, and Venezuela. These countries have not used oil revenues to diversify economies and build infrastructure for the post-petroleum future. Instead the monies have gone to fund larger and larger transfer (welfare) payments to mushrooming populations.
Adelman’s vindication will mean these nations must curtail such payments when they are forced to cut sales and production sharply or when prices fall. Political instability will increase as such times.
Supply and demand are complicated things. There's a reason economists love the phrase ceteris paribus – "all else being equal" – and thats because most of the time, they aren't. Fracking will introduce a downward pressure on prices, we know that. But the responses of the multifarious other producers and consumers to that pressure are chaotic and barely predictable. A simple prediction of a world of cheap oil might not be as safe a bet as it seems.