Global shale oil production could boost global GDP by up to $2.7 trillion by 2035

• Shale oil production has the potential to reach up to 12% of global oil production, equivalent to almost 14 million barrels a day
• This extra supply could push global oil prices down by around 25%-40% in 2035 relative to an EIA baseline projection of $133 per barrel in that year (in real terms)
• Level of global GDP could increase by around 2.3%-3.7% ($1.7-2.7 trillion at today’s GDP values)
• Benefits of oil price reductions due to shale oil will vary significantly by country
• Presents significant strategic opportunities and challenges for the oil & gas industry and governments

New Delhi: The global impact of shale oil could revolutionise the world’s energy markets over the next couple of decades, resulting in significantly lower oil prices, higher global GDP, changing geopolitics and shifting business models for oil and gas companies, according to new analysis from PwC.

The report, Shale oil – the next energy revolution, examines scenarios that consider the potential impact of future growth in shale oil production on global oil prices and assesses how these changes could impact the wider economy and the oil and gas industry over the period to 2035.

John Hawksworth, chief economist at PwC and co-author of the report, said:

“Lower global oil prices due to increased shale oil supply could have a major impact on the future evolution of the world economy by allowing more output to be produced at the same cost. These effects could build up gradually as shale oil production rolls out across the world to produce an estimated rise in global GDP of around 2.3%-3.7% in 2035. This would be roughly equivalent to adding an economy the size of the UK to total global GDP in that year.

“However, the economic benefits of oil price reductions will vary significantly by country. Large net oil importers such as India and Japan may see their GDP boosted by around 4%-7% by 2035 in our alternative scenarios, while the US, China, Germany and the UK might gain by around 2%-5% of GDP.

“By contrast, major oil exporters such as Russia and the Middle East could be significant net losers in the long term unless they can develop their own shale oil resources on a large scale.”

The estimated impacts on GDP by country and for the world as a whole are summarised in the table below.

Estimated change in GDP in 2035 due to 25%-40% cut in global oil prices due to shale oil

Note: We do not have GDP impact estimates for the Middle East region, but model estimates suggest that the current account balances of this bloc of countries could deteriorate by around 4%-7% of GDP in 2035 due to falls in oil prices in alternative shale oil scenarios.

Source: PwC analysis using the National Institute Global Econometric Model (NiGEM)

The quality and quantity of the shale oil resource base outside the US is poorly understood and this remains a critical uncertainty over the potential for shale oil development. The PwC study underlines the value of supporting investment to develop understanding of this significant new resource.

Deepak Mahurkar, Leader Oil & Gas PwC India said:

“Being a crude oil importing country, India is projected to benefit with global shale oil sector development. If the possibility of sizeable shale oil resources in India expressed in past is true, India also has a sound case for domestic development. The merit lies in exploiting the maturing technology, and dealing with local policy to be able to turn shale oil development into an excellent opportunity.”

The PwC analysis suggests that shale oil production has the potential to spread gradually from its current US base, increasing to almost 12% of the world’s total oil supply by 2035. Given the relative insensitivity of oil demand to price changes, PwC scenario analysis suggests that oil price falls (relative to the reference case EIA projection – see note 2) of as much as 40% could be needed by 2035 to increase demand sufficiently to absorb this additional supply. However, the oil price fall (relative to the EIA baseline) could be restricted to around 25% if OPEC reduced its output in response to offset part of the rise in shale oil output.

Opportunities and challenges for governments, energy companies and their customers

The report also looks at the opportunities and challenges for stakeholders in the energy industry, including:

• Governments in current net oil importing countries with potential shale oil resources will need to understand the likely economic payback from creating policies to encourage exploitation of shale oil, balancing these against alternative local and national environmental objectives (e.g. decarbonisation).
• Governments in countries reliant on conventional oil exports will need to adjust to lower revenue flows in the long run and/or develop their own unconventional resources, including shale oil and gas.
• Shale oil (together with shale gas) could influence the dynamics of geopolitics as it increases energy independence for countries such as the US and China and reduces the influence of OPEC.
• Oil companies will have to reassess their current portfolios and planned projects against lower oil price scenarios, while also adjusting their business models to fit the lower-scale but more standardised production process required for shale oil.
• Lower than expected future real oil prices could also create long term benefits for companies that rely heavily on oil and related products (e.g. petrochemicals and plastics, airlines, road hauliers, automotive companies, and the LNG sector given that its prices are often linked to oil).

Adam Lyons, director in the PwC oil and gas team and co-author of the report, said:

“The potential availability and accessibility of significant resources of shale oil and the estimated effect of increased production on limiting growth in global oil prices has implications that stretch far beyond the oil industry.

“Shale oil has the potential to reshape the global economy, increasing energy security, independence and affordability in the long-term. However, these benefits need to be balanced with broader environmental objectives at both the local and global level, and consequent changes in policy and regulatory regimes will undoubtedly have knock-on effects on oil producers and consumers.

“The implications of the growth in shale oil will be felt along the value chain. Investment choices based on long- term predictions of a steady increase in real oil prices may need to be reassessed in the upstream, midstream, downstream and oilfield services sectors.”

Notes to editors:

1. Shale oil, like shale gas, is a resource which is produced through horizontal drilling and hydrofracture or ‘fracking’. It is also referred to as ‘light tight oil’. Shale oil resources, based on the evidence available to date, are widely distributed around the world as discussed in more detail in the report.
2. The PwC scenario analysis starts from a baseline reference case projection by the US Energy Information Administration (EIA) that real oil prices will rise to around $133 per barrel by 2035 (expressed in real terms adjusted for general US price inflation). This EIA projection assumes minimal shale oil production and strongly rising demand from China and other emerging economies. The PwC scenario analysis suggests that rising shale oil production could instead lead to real oil prices in 2035 of around $83-100 per barrel (i.e. around $33-50 per barrel lower than in the EIA projection, equating to a relative price fall of around 25-40%).

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