US Shale Revolution Expected to Shrink Amid Falling Oil Prices

MOSCOW, December 18 (Sputnik) — Falling oil prices are affecting the global economy primarily positively, while posing a risk that the US shale revolution will shrink, as shale oil becomes less cost-effective, experts told Sputnik News Agency.

“I expect that the US shale revolution will shrink back greatly, perhaps continuing with existing wells, but adding many fewer wells in the future,” Gail Tverberg, a fellow of the Casualty Actuarial Society told Sputnik. “Interest rates on energy junk bonds are much higher than they were in the past. These higher interest rates will make it less economic to drill, even if prices should go back up again.”

Tverberg underlined that the US fracking industry is already being affected, with new oil and gas well permits in shale formations falling by over 30 percent.

At the same time, economists stress that lower oil prices are beneficial for the global economy.

“Mostly oil consumers react more than producers,” Gabriel Sterne, the head of global macro investor services at Oxford Economics told Sputnik. “That is good for global consumption and we expect output to increase by about 0.2% next year compared with where we were at the start of November.”

Sterne stressed that falling oil prices are also destabilizing the global economy, which in turn reduces the potential benefits. He pointed out that with this in mind, Russia is the biggest concern.

Gail Tverberg underlined that the initial growth spurt in oil-importing countries would not last long, because of the effect of debt defaults, so that after six to twelve months, they will see a recession, related to lower oil production.

“I think that there is a real possibility that the debt default problem will spread, and eventually bring down the production of all fossil fuels,” Tverberg said, adding that in other words, low prices will lead to “peak oil,” “ peak gas,” and even “peak coal.”

Francesca Panelli, international economy analyst with Oxford Analytica, told Sputnik that the fall in oil prices could push euro-area GDP growth up by around 0.5 percentage points over the next two years.

Nigel Davis, an insight editor with the Independent Chemical Information Service (ICIS) noted that the current low oil prices are being translated directly down to much lower petrochemical prices in Asia, Europe and in the United States.

“It means that currently buyers of those petrochemicals are not buying. They are waiting to see, they don’t know what the floor of the oil price is, and they don’t know how much lower the oil prices might go,” Davis told Sputnik, adding that there is not much activity in the oil market at the moment.

He said also that in the longer term, lower prices may stimulate growth in some parts of the world. But the trouble with oil is that the supply is pretty inelastic, and it is difficult to increase or decrease the supply.

“In the past year we’ve seen the demand drop off mainly because of weaker China’s economy and weak Eurozone as well, and much weaker growth in the US economy,” Davis said adding that the prices are likely to continue to fall into 2015.

Gail Tverberg forecast that the price could drop below $30 per barrel and may never rebound to $80.

“Lower oil prices mean that less preparatory work is being done on sites that appear to have oil. This means that oil production will drop in the future, even if oil prices rebound,” she told Sputnik, adding that with lower oil production, the future world production of goods and services would drop, thus leading to a recession.

Tverberg further explained that between recession, emerging market debt, and debt related to shale operations, debt defaults are likely to become a very major problem.

“When ETFs and derivatives are added to the mix, the impact of debt defaults is likely to becomes much larger, because securities owners do not even have to be directly affected to be exposed,” she said.

Eventually, according to Tverberg, it will be hard to keep banks solvent, which will result in stock markets falling.