Kemp: Forecasts For Higher Oil Prices Misjudge The Shale Boom

Prices must continue to rise in real terms, they say, to reflect the increasing cost of producing crude and to restrain demand. Price increases will prove to be just as disruptive as physically running out of the stuff.

Hamilton's paper lends influential support to this view. He notes that oil demand is now being driven by rising incomes in emerging markets, even as high prices restrain consumption in the advanced economies.

He also claims that much of the growth in oil production since 2005 has come in the form of he calls "lower quality" natural gas liquids, which have a much lower energy content and energy density than conventional crude.

Production of conventional crude oil has stagnated, despite surging prices and unprecedented spending on exploration and production activity.

"Depletion of older reservoirs and the high cost of developing new resources" explain why conventional oil output has not responded to climbing prices, Hamilton concludes.

Shale Skeptic

The paper is sceptical about whether shale oil can alter the supply outlook fundamentally because of its high production costs and the difficulty of replicating the boom outside the United States. But this is the least convincing part of Hamilton's argument.

The paper confuses the struggling economics of dry gas wells with the much more attractive economics of wet gas and oil plays.


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