U.S. Shale Revolution and Its Spillover Effects on the Global Economy

• Author: Ravi Balakrishnan - Keiko Honjo - Akito Matsumoto - Andrea Pescatori
• Pages: 4-6

IMF Research Bulletin

4 4

U.S. Shale Revolution and Its Spillover Effects on the Global Economy

Ravi Balakrishnan, Keiko Honjo, Akito Matsumoto, and Andrea Pescatori

The U.S. oil industry e xperienced one of its most dramatic

shifts in 2010–14, when a combination of high prices and tech-

nological change (notably horizontal dril ling) led to a doubling

of U.S. crude oil production . Both the number and productiv-

ity of rigs increased, w ith important implications for the oil

market and the global economy more broa dly. Following the

2014–15 oil price collapse, the re has been active debate about

the ability of the U.S. oil industry to a bsorb the shock and

reequilibrate the global oil market. An impor tant piece of this

puzzle is understa nding whether the shale industry can sustain

its past exponentia l productivity increases. This note proposes

three scenarios for shale produ ction and draws out the spillover

implications for some major oil importe rs and exporters.

The advent of shale oil production has added about

5million barrel s a day (mbd) to the crude oil marke t,

contributing to a global supply glut. U.S. pet roleum

production accounted for 60 percent of world petroleum sup-

ply growth from 2011 to 2015. e supply glut is a key factor

behind the dra matic decline in oil prices start ing in mid-2014,

from $108 a barrel to less than $30 in early 2 016. Changes in

the strategic behavior of t he Organization of the Petroleum

Exporting C ountries (OPEC) in November 2014 and the

projected increase in Ira nian exports were also import ant

factors behind the glut. In re cent meetings in September

and November 2016, OPEC changed its strategy again to cut

production in order to stabilize pric es. However, the targeted

production, 32.5 mbd, is only 1.2 mbd lower than its h ighest

level of production. In addition, OPEC members have tended

to produce more than their quota in t he past, which calls

the credibility of t he production cut into question. On the

demand side, downward revisions of globa l growth, especially

in emerging markets , added downward price pressures—as

did the turmoil i n nancial markets and the st rong dollar.

Looking ahead , the secular drop in petroleum c onsumption

in advanced economies and sc aled-down potential growth for

emerging markets point to modest g rowth for oil demand.

In this context, it is i mportant to assess the resilience of

shale oil production to low oil prices. U.S. sha le oil pro-

duction has been fairly resi lient overall, in spite of low oil

prices, thank s to continued phenomenal eciency gains,

-1

-0.5

0

0.5

1

1.5

2

2.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(year over year change)

WTI

# of Oil Rig in Operation

US shale production

Figure 1. United States: Oil Price and Weekly Rig Count

Source: Baker Hughes, Energy Information Administration, and Datastream

Research Summaries