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Analysis: Is the US Shale Revolution a positive occurrence or a risky affair?

Sharon Magen discusses the US Shale Revolution, pointing out that while the revolution has several upsides, it is also responsible for certain possible global downfalls.
Shale gas exploration project (archive) Photo Credit: EPA

The sharp increase in US oil and natural gas production has transformed worldwide trading patterns immensely. More than anything else, it has enabled and cemented the bargaining power of buyers in the global market place. The EU today is one of the main global players benefiting from this heightened bargaining power, as it has taken the place of the US as a main recipient market for major waves of liquefied natural gas (LNG) that had been originally intended for the US market. In 2005, only a little more than a decade ago, the US Energy Information Administration had anticipated that US LNG imports in 2015 would reach 12 billion cubic feet per day (bcf/d), three times more than the 10 bcf/d currently exported by Qatar, the world’s largest producer.

However, in light of the "Shale Revolution," those LNG volumes were redirected, largely to the European market. This assisted in driving down spot gas prices in the continent and forced many chief gas exporters, including Russia, Norway, and Algeria, to bargain with European consumers. Producers were obliged to offer substantial price discounts and increasingly accommodating contract terms to their European customers.

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Not only did the Shale Revolution contribute to driving down prices, it has also reinforced energy security. Returning to the EU, in the past, Europe had suffered from a continued lack of energy security, deriving from the continent’s fervent dependence on Russia for energy supplies. This dependence did not only impede the EU’s ability to respond to events such as the Crimean crisis but also rendered Europe strongly tied to the Russian state gas company Gazprom and its pricing policies.

The current oversupply of oil and natural gas in the global market, which the Shale Revolution" had brought upon, created an abundant and competitive market, which plays in favor of buyers. In the case of Europe, this potently decreased its reliance on Moscow and thus provided better energy security. It is plausible to assume that this is current for all buyers in the global energy market.

However, not all is perfect. The Shale Revolution is also responsible for certain possible global downfalls. The present oversupply in gas markets, alongside the low level of oil prices, has brought down prices in all the major markets. According to the New Policies Scenario, the global LNG market will not rebalance until the mid- 2020s, a consideration that curtails profitable export prospects of energy in the meantime.

A limited lucrative export scenario might dissuade investors and exporters from continued efforts in this sector, leading to an eventual downfall in supply and therefore ultimately higher prices. Nevertheless, thanks to a current highly integrated market, new business models, emerging technologies and government policies and more, it is plausible to assume that oversupply can be dealt with, thus guaranteeing continued low prices without curtailing supply.



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JOL Blogger | Sharon Magen

Sharon is a young American-Israeli currently based in Paris, France, as a Master's exchange student at the Paris Institute of Political Studies (Sciences Po). She is currently interning at the Permanent Mission of Israel to the OECD and involved in various student initiatives, such as the SciencesPo Refugee Help Think Tank and the Paris – Tel Aviv association, which promotes Franco-Israeli cultural ties.

Her undergrad was completed at the Hebrew University of Jerusalem in the fields of International Relations and South East Asian Studies. She has vast research experience from my time in the military as an officer in the strategic division and has also interned at the INSS (Institute for National Security Studies) in the fields of Sino-Israeli Relations and the GCC (the Gulf Cooperation Council).


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