quantitative e⁄ects of the shale oil revolution on oil prices...
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Quantitative Effects of the Shale oil revolution on OilPrices
Cristiana Manescu Galo Nuño
European Central Bank
Oslo - June 2014
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 1 / 23
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Introduction Motivation
What is the shale oil revolution?Oil markets have recently undergone a significant transformation with the unexpected rise in theUS production of shale (light, tight) oil
The combination of horizontal drilling techniques together with hydraulicfracturing and rising oil prices have made the exploration and exploitation oflarge volumes of shale oil possible.
The production of shale oil is so far very much concentrated to the US
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 2 / 23
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Introduction Motivation
Significant expansion in US productionUS shale-oil production is expected to reach 4 mb/d by 2018 according to EIA
Figure: United States oil production by type (in mb/d, EIA Scenario)
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 3 / 23
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Introduction Aim of the paper
This presentation: which is the oil price impact of theshale oil revolution?We propose an analytical exercise employing a DSGE
Quantitative assessment under different production scenarios.
A critical issue is the behavior of Saudi Arabia
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Saudi Arabia and the oil market
Why is Saudi Arabia so relevant?
“OPEC is Saudi Arabia”
—Mabro (1975)
“The Saudis have acted as what they are:
the leading firm in the world oil market”
—Adelman (1995)
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Saudi Arabia and the oil market
Saudi Arabia is not a price-taker in the oil market
Saudi Arabia is the world’s largest oil exporter and owns the largest known oilfields
Saudi Arabia is the only producer which “shuts in” significant spare capacity(Smith, 2009)
Saudi Arabia’s oil output has been highly volatile despite the lack of domesticshocks
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 6 / 23
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Saudi Arabia and the oil market
Saudi Arabia maintains ample spare capacitySpare capacity of the four major OPEC producers. In million barrels per day
2000 2002 2004 2006 2008 20100
0.5
1
1.5
2
2.5
3
3.5
Saudi ArabiaIranIraqVenezuela
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Saudi Arabia and the oil market
Saudi Arabia’s oil output has been highly volatile ...Market shares of the four major OPEC producers. Individual production over world production
1975 1980 1985 1990 1995 2000 2005 20100
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2Saudi ArabiaIranIraqVenezuela
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Saudi Arabia and the oil market
... even if the Kingdom has been an “island of stability”
Instances when Saudi production was directly affected by exogenous events
1977 fire at the Abqaiq facilities
1984 several Saudi tankers destroyed during the Iran-Iraq war
1991 attacks by Iraqi missiles during the Gulf war
“Offi cial Oil Market Chronology”—U.S. Energy Information Administration
Apart from these episodes, changes in Saudi oil output were the result ofproduction decisions; not the consequence of disruptions in its productioncapabilities
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DSGE model Overview
We employ the DSGE model from Nakov and Nuño“Saudi Arabia and the Oil Market”(Economic Journal, 2014)
Saudi Arabia is a dominant firm, with the rest of oil producers as acompetitive fringe (Dynamic Stackelberg game)
The behavior of the dominant firm can be seen as a profit maximizingresponse
Spare capacity allows fast adjustment of output as necessary in response todemand and supply shocks
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DSGE model Overview
The model in a nutshell
Three regions: one oil-importing and two oil-exporting ones
The oil-importer uses oil in consumption (gasoline)
Oil is a homogeneous commodity supplied by two types of producers: adominant firm and a “competitive fringe”
The fringe takes the oil price as givenThe dominant producer faces a downward sloping “residual demand” curve,picking profit-maximizing points
No borrowing across regions and abstract from monetary and exchange ratefactors)
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DSGE model Model performance
The model is able to replicate the main stylized facts ofthe market
Data and model standard deviations*
Oil Oil Fringe Saudiprice output output output
Data 8.5 1.6 1.5 6.6Model High elasticity 8.1 2.2 3.3 6.5
Low elasticity 8.3 1.2 1.7 6.4*Standard deviations, in percentage points, of first log differences.
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DSGE model Model performance
The volatility in the dominant supplier is consistent withthe response of a monopolistImpulse responses to a supply and a demand shock
0 20 40-2
0
2
4
6Total oil output
0 20 400
2
4
6
8Oil price
0 20 40-2
0
2
4
6GDP of importing region
0 20 40-5
0
5Fringe oil output
0 20 400
0.5
1
1.5Dominant producer share
0 20 40-2
0
2
4Consumption of importing region
0 20 400
2
4
6
8Dominant producer oil output
Months0 20 40
0
5
10
15Dominant producer investment
Months0 20 40
-6
-4
-2
0
2Shock process
Months
Supply shockDemand shock
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DSGE model Model performance
Event study: the Persian Gulf war of 1990-91The model explains the dynamics of Saudi Arabia production (only 1 shock: fringe supply)
1990.5 1991 1991.5 19924
5
6
7
8
9
10
11Saudi oil production
Mill
ion
barre
ls p
er d
ay
1990.5 1991 1991.5 199245
50
55
60Fringe oil production
Mill
ion
barre
ls p
er d
ay
1990.5 1991 1991.5 19920
10
20
30
40Real oil price
Con
stan
t US
D
date1990.5 1991 1991.5 1992
55
60
65Total oil production
Mill
ion
barre
ls p
er d
ay
date
DataHigh elasticityLow elasticity
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Scenarios
We consider three scenariosAnticipated shocks
1 Baseline scenario: shale oil production in the US increases from roughlyzero in 2010 to 2.7 mb/d in 2014 and reaches a peak of 4 mb/d in 2018.Data from EIA May 2014
1 Current law and regulations affecting the energy sector remain in placethroughout the projection horizon.
2 Production of shale oil remains concentrated in the US and does not extendsignificantly to other countries before 2020.
2 Lower shale production scenario: political, technical or environmentalconstraints limit US shale production which remains broadly flat across theperiod 2014-2018.
3 Higher shale production scenario: technological progress, political will andeconomic incentives push up US shale production, which reaches 6 mb/d bythe end of the decade
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 15 / 23
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Results Quantitative effects of the shale oil revolution
Differential effect of different oil shale production scenarios
2014 2015 2016 2017 20180
1
2
3
4
5
6
mbd
Shale oil production
2014 2015 2016 2017 2018-10
-8
-6
-4
-2
US
D p
er b
arre
l
Oil price difference
2014 2015 2016 2017 20180.5
1
1.5
2
2.5
3
mbd
World oil production difference
2014 2015 2016 2017 2018-3
-2.5
-2
-1.5
-1
-0.5
mbd
Saudi Arabia production difference
baselinehigher shale productionlower shale production
Figure: Differential effect of different oil shale production scenarios All the figuresrepresent differences compared to the counterfactual scenario of no shale production
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 16 / 23
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Results Quantitative effects of the shale oil revolution
Take away
1 Most of the shale oil revolution is already priced in.2 Even considerable changes in the scale of the production will have only asmall effect on prices.
1 The oil price impact of the increase in supply under the different scenarios by2018 amounts to changes of less than ±USD4 per barrel. This is smallcompared to the average oil price volatility.
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Results Shale oil supply and Saudi Arabia’s reaction
What if Saudi Arabia deviates from its optimal rule?Saudi Arabia lowers its production in order to partially offset the increase in global supply
However, Saudi Arabia can deviate from its profit-maximizing path andinstead maintain or even increase production.
This would preserve its oil revenues and may push shale oil producers off themarket.
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 18 / 23
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Results Shale oil supply and Saudi Arabia’s reaction
Are there similarities with the 3rd oil shock of themid-1980s?Saudi Arabia maximizing revenues instead of profits
Total oil production and oil prices(monthly absolute differences with
respect Jan 1981)Saudi Arabia oil production and oilrevenues (monthly data changes)
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Results Shale oil supply and Saudi Arabia’s reaction
We analyze the case of Saudi Arabia maximizing revenuesinstead of profitsIn an alternative scenario
The profit maximizing scenario corresponds to the higher shale productionscenario above (worst-case).
Alternative scenario (revenue scenario): Saudi Arabia deviates from theprofit-maximizing path by keeping approximately constant its revenues (sincethe end of 2013).
Commitment of Saudi Arabia to defend its revenues is public information: therest of agents in the economy are aware of it since 2013 and may formexpectations (and take actions) accordingly
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 20 / 23
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Results Shale oil supply and Saudi Arabia’s reaction
The impact on prices is still moderateLess than USD1 pb by 2018
2014 2015 2016 2017 20182.5
3
3.5
4
4.5
mbd
Shale oil production
2014 2015 2016 2017 2018-6.5
-6
-5.5
-5
US
D p
er b
arre
l
Oil price difference
2014 2015 2016 2017 20181.5
1.6
1.7
1.8
1.9
mbd
World oil production difference
2014 2015 2016 2017 2018-2
-1.5
-1
mbd
Saudi Arabia production difference
baselinerevenue scenario
Figure: Differential effect of alternative Saudi Arabia production scenarios All the figuresrepresent differences compared to the counterfactual scenario of no shale production.
Manescu & Nuño (ECB) Shale oil revolution Oslo - June 2014 21 / 23
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Results Shale oil supply and Saudi Arabia’s reaction
Saudi Arabia’s profits would sufffer in this caseDue to the increase in costs
2014 2015 2016 2017 2018-200
-180
-160
-140
-120
Mill
ion
US
D p
er d
ay
Revenue difference
2014 2015 2016 2017 20189
9.5
10
10.5
11
% W
orld
oil
supp
ly
Market share
2014 2015 2016 2017 2018-10
-5
0
5
US
D p
er b
arre
l
Profit per barrel difference
2014 2015 2016 2017 2018-4
-2
0
2
% o
f GD
P (2
012)
Profit difference
baselinerevenue scenario
Figure: Domestic effect of alternative Saudi Arabia production scenarios.
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Conclusions
Conclusions
The shale oil revolution may have a major role in the US economy, but itsimpact on the oil market is expected to be moderate.
Numerical estimates using a DSGE model suggest that it has produced a fallin prices of USD5 per barrel, already priced in.
Looking forward, different scenarios by 2018 imply changes of less than±USD4 per barrel.
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IntroductionMotivationAim of the paper
Saudi Arabia and the oil marketDSGE modelOverviewModel performance
ScenariosResultsQuantitative effects of the shale oil revolutionShale oil supply and Saudi Arabia's reaction
Conclusions
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