Shale Oil Reserves: A Game Changer Or Just Over Hyped?

by: Shaun Connell

Part of the peak oil debate is a discussion on how much oil is "left" for people to consume. Those who reject peak oil (or at least the "doomsday" forms of it) often point to unconventional oil sources as shale oil, oil sands, and even non-oil sources like natural gas or renewable energy.

For example, in my article on the peak oil myth, I wrote:

Innovation makes some oil sources economically recoverable that used to not be recoverable. For example, according to the Economist last year, we were seeing demand outstrip supply. But that doesn't mean we were seeing peak oil. Even with increased demand, we were seeing a boost in production.

This is an important issue when it comes to the price of any commodity consumption; lower quality reserves suddenly become economically recoverable as the price of the commodity increases.

This does have a "limit", obviously -- there's only so much oil, period. The real question is whether we'll be able to have enough "time" to switch over to alternatives before the price of everything essentially skyrockets wreaking economic havoc on the world. I'm in the camp that believes we're far closer to viable alternatives than most doomers seem to believe.

Either way, shale oil is a great example of oil reserves that exist that aren't yet fully economically recoverable -- but if oil prices continue, they definitely will be. But how much is there? How much does it cost? And how much energy can we get out of shale oil?

How Much Exists?

It's difficult to know exactly, but the shale oil reserves in the Bakken are expected to produce 2-to-20 billion barrels, depending on a wide variety of estimates. For the sake of caution, it's generally best to assume the lower estimates are true until we get more positive proof to the contrary.

This is different than the overall estimated amount that just exists in the area -- that amount could be in the hundreds of billions. But it's not economically recoverable, so it's mostly a mute point. This is why if oil prices change and continue to increase, we could see the "reserves" go up dramatically. Different prices mean different amounts of recoverable sources.

At the Eagle Ford formation, we see around 3 billion barrels of technically recoverable oil, according to the Department of Energy.

How much exists is meaningless, of course, until we see how much is being and will continue to be produced, at least where it's readily available for investment. In the US, tight oil production will likely keep increasing over the next couple of decades, until it doubles by 2035, according to the US government.

Is This Great News?

That shale-oil production is getting easier to do isn't good news and bad news, depending on how you look at it. The days of easy to get oil are progressively disappearing, as they have been for a century. This means it takes more energy and -- hence -- more cost to produce the same amount of energy we had before.

This means the costs of everything will keep being felt. This is bad for the overall economy -- until, of course, all of this increased spending helps incentivize alternatives so oil production and consumption will drop because of a lack of demand and not a lack of supply.

Make no mistake -- a supply-based drop in production is economic hell, and a demand-based drop in production isn't nearly going to be as rough. I realize supply and demand are both necessary, but the different changes are vital to understanding the different economic consequences. If people consume less oil because we've switched to electric cars, natural gas buses and trucks, then the economic impact isn't nearly as rough as if we suddenly just can't afford to travel or transport as much as we used to be able to.

Oil Prices To Explode And End Civilization?

The price of oil needs to stay in the $60+ range to keep production going. This shouldn't be a problem, because, as Ryan Lance, the president of ConnocoPhilips said recently:

It's tough to imagine the world going back to $50 to $60 a barrel of oil.

Going forward over the long-haul, much oil will become economically recoverable that wasn't already, boosting production in the coming decades. Still, this means the price will likely keep increasing for basic energy consumption, especially when we remember that it takes more energy to produce this oil. The EROEI ratio will be dropping as it gets more and more expensive.

Still, the doomsday accounts are overblown at best. If oil prices continue to increase, the buses and truck fleets of the world will have an economic incentive to switch to natural gas, and the investment and research and interest in electric vehicles will continue to increase.

We don't have to switch over all at once. It's very possible in 20 years we'll see people with gasoline-based sedans parked next to natural gas pick-up trucks and electric coups. The market will price the alternatives accordingly, and the boom in financing will help increase the technology needed to get more energy sources at a cheaper price.

Going forward, shale oil reserves will be increasing, production will jump, and a nice hunk of energy consumption in the US will go to building US infrastructure rather than foreign infrastructure. This will help partially offset the increase in fuel prices, and will help US companies continue to push for alternatives to petroleum in general.

Shale oil isn't going to be a game changer in the sense that we'll have another century of cheap oil, but it's definitely helping the US economy transition from cheap oil to alternatives without the extreme shock that would exist alternatively.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.