Has Shale Oil Production Lowered Gas Prices?

By Kimberly Amadeo

Question: Has Shale Oil Production Lowered Gas Prices?

Shale oil is a high quality crude oil that's embedded between layers of shale rock, impermeable mudstone or siltstone. The rock must be fractured to release the trapped layers of oil. Shale oil should not be confused with oil shale, which is rock suffused with kerogen, a precursor to oil. However, in some cases shale oil is also used to describe oil that's been converted from kerogen in shale rocks.

Answer: Shale oil lowers gas prices by increasing the supply of oil in the U.S.  As a result, the U.S. Energy Information Administration (EIA) predicts that oil prices will drop to an average of $101 per barrel in 2014, down from the average $112 per barrel in 2012. As of February 2014, its prediction has held true. For more, see Oil Price Forecast.

However, oil supply is not the only factor affecting oil prices. Oil is traded on global exchanges. Commodities traders can bid the price of oil up if there are concerns about disruption in supply. For example, oil prices skyrocketed when Iran threatened to close the Straits of Hormuz in 2012.

Shale Oil Production

More than a third of the onshore production of crude oil in the lower 48 states is from shale oil. As a result, the latest EIA projection states that domestic oil production will rise from 5.7 million barrels/day in 2011 to 7.5 million barrels/day in 2019. Most of this increase comes from ongoing shale oil, so that these fields will increase their share to more than half by 2019. 51 percent of total lower 48 onshore oil production in 2040, up from 33 percent in 2011.

In 2005, the U.S. relied on foreign oil for 60% of its daily consumption. By 2011, that had dropped to 45%, and is projected to fall further, to 34% in 2019. A percent in 2005 before dipping below 50 percent in 2010 and falling further to 45 percent in 2011. Shale oil being successfully mined using horizontal drilling and hydraulic fracturing, or fracking. It's mostly produced in the Bakken fields in North Dakota and Montana. However, some is being mined in the Eagle Ford fields in Texas. (Source: EIA, 2013 Forecast)

Shale Oil Reserves

By far, the largest U.S. reserve is the Monterey Shale formation near Bakersfield, California. It has four times the oil as the Bakken Field in North Dakota. It's 1,750 square mile area contains 15.4 billion barrels of oil - about 2/3 of the nation's total shale reserves. However, the California shale oil is much more difficult to extract than the Bakken, and environmental groups are much more opposed. That's because its geological formation requires more intensive fracking and deeper horizontal drilling. That's of concern in a state that lies on the San Andreas fault, and already gets more than its fair share of earthquakes. (Source: NYT,Vast Oil Reserve May Now Be Within Reach, February 4, 2013)

Bakken Field in North Dakota and Montana is the largest producing shale oil reserve. The field has layers of dense, oil-bearing rock about two miles underground. The field is roughly the size of West Virginia, and produced 770,000 barrels of oil a day as of December 2012. Although production really started to take off in 2006, levels doubled in just the last two years. At this point, 95% of production is from horizontal wells. As a result, North Dakota extracts more oil than Alaska, and is closing in on the two million barrels a day produced by Texas. In 20 years, its number of wells could increase from the current 8,000 to at least 40,000. Part of the reason for expansion is that each well runs dry after about two years. That's because the oil is trapped in pockets that don't hold as much oil as traditional wells. However, in total, the field could contain nearly 4 billion barrels of shale oil. (Source: EIA,Bakken formation oil and gas drilling activity mirrors development in the Barnett, November 2, 2011; CNBC, Bakken Emerges as Contender for US Oil Drilling Crown, March 23, 2013) )

The Eagle Ford field in Texas produced 750,000 barrels/day as of 2011, nearly all from horizontal wells. The U.S. Geological Survey estimates there are 853 million barrels in undiscovered reserves. Drillers are searching for both oil and natural gas. (Source: EIS, Trends in Eagle Ford drilling highlight the search for oil and natural gas liquids, November 2011)

The Utica field in Ohio has anywhere from 1.3 and 5.5 billion barrels of oil. Ohio is currently producing 5 million barrels of oil a year. So far, the oil reserve is still being explored. (Source: EIS, Oil and natural gas drilling in Ohio on the rise, September 2011)

Shale Oil Extraction

Advances in technology made shale oil extraction profitable when oil reached $100 a barrel. This method frees the oil by cracking the shale surrounding it with high-pressure bursts of water, sand, and chemicals. The water and chemicals are used to fracture the shale. The sand is left behind to hold the fractures open, allowing the oil to seep into the well.

In the Bakken, multistage fracking is used to create longer cracks. Short segments of the production casing is perforated, allowing them to concentrate the bursts of water in specific spots.

The second technological advancement was horizontal drilling. First, oil companies drill down as far as two miles, where the layers of oil and shale exist. The well must then be curved at a 90 degree angle, and run horizontally through the thin formation. The horizontal well can also run for as long as two miles. Although horizontal drilling was used as early as 2004, it didn't become affordable until 2009. That's when Brigham Oil & Gas successfully split a single horizontal leg into 25. Each leg was fracked independently, allowing much more return for the investment.

Fracking is controversial because it uses a lot of resources and its effects are unknown. Before the first drop of oil can be extracted, each well typically needs 800 truckloads of water, as well as hundreds of truckloads of other material. Unless the water is already on site, it must be trucked in, and stored in massive tanks, before the fracking can begin. The composition of the fracking fluid is proprietary to each company -- and a trade secret. In addition, frackers don't have to comply with the Safe Drinking Water Act. Therefore, it's unknown what chemicals could ultimately be leached into the water table decades, or even just years, from now.

Most of the water that's pumped in returns to the surface. It can be contaminated with unknown underground chemicals, including trace amounts of radioactive material. Normal water treatment facilities are not equipped to deal with this water, so it is pumped into ponds. The long-term impact of this water is still being studied.(Source: University of Michigan, The Impact of Fracking; National Geographic, Bakken Shale Oil, March 2013)

(Source: EIA, North Dakota Production Reaches New High in 2012, March 18, 2013) Article updated February 27, 2014