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Petrol and Diesel in India have crossed Rs 100/litre. Crude oil is getting expensive and with prices refusing to fall, global oil-producing countries like Saudi Arabia, UAE, Russia, etc. are involved in a deadlock. While oil prices are in dismay, an alternative source to conventional crude oil is thriving in the US. It is the Shale Oil and Gas Industry. In 2020, the United States of America turned a net exporter of ‘petroleum’(not crude oil) for the first time since 1949. In this piece, we discuss the Shale Revolution in the US, the difference between Shale and Crude oil, and the economics around it.

What is Shale Oil? How is it different from crude oil?

Speaking of conventional crude oil, it is a viscous liquid substance found beneath the surface of the earth. It can be found on land or the sea. Crude oil can be extracted directly, it is easy to transport, process, and refine. There is an abundance of crude oil reserves around the world.

Coming to shale oil. Shale oil is mostly found on land, but sometimes also found underneath water basins. It is extracted from rocks called oil shales. These rocks are broken or fractured artificially in a process called fracking. A mixture of oil and gas erupts from these rocks which are later extracted and processed to form shale oil. It can also be used to produce a more gaseous form called shale gas. Shale oil and gas are pretty much the same as crude oil and natural gas. Just that they are obtained from special rock structures called ‘shales’.

The process is relatively new, stirring a debate on whether the oil is environmentally friendly or not. There has been a rising ‘anti-fracking moment’ in the US, whose supporters argue that the method is not environment friendly.

Shale Economics

America saw a huge jump in oil production between 2010 and 2015. This was the period when the US invested intensively in shale oil discovery. In 2020, shale oil accounted for a staggering 65% of the total crude oil produced in the US. That is a huge number.

There are two major problems that shale oil poses. First, its extraction is a costly affair. Second, it poses a major environmental threat. Oil shales deposits are generally deeper than crude reserves. The only way to extract is to drill deep beneath the surface of the earth and extracting it. The next challenge is processing it to convert it into crude oil and petroleum.

The cost of producing one barrel of shale oil is anywhere between $35-$65. Shale oil companies would make money only when the global crude oil prices are greater than the cost of production, assuming that the demand remains intact. Essentially, higher prices would work in the best interests of the US.

There is a question that analysts pose. Are shale companies profitable? There is no black and white answer to that. Some shale companies that seized opportunity dug the right oil wells and cut down on costs, were profitable even when crude oil prices were at $40 per barrel, much lower than the breakeven price.

The shale oil industry saw tremendous growth under the Trump administration. Former US President Donald Trump followed an expansionist policy and believed that his country needed to be energy independent. Trump administration invested extensively in the oil and gas industry in the US. It pushed for discovering and setting up new oil fields. The current US President Joe Biden is rather conservative when it comes to the oil and gas industry. He is pushing for production cuts and lower prices because of its negative impact on climate change, the environment, and marine life. He is also in favor of renewable and cleaner sources of energy. This is something that should worry the shale oil industry.

Speaking of the environmental impact of shale extraction. There has been a rising anti-fracking movement in the US, led by climate change and environmental activists. France, the Netherlands, Scotland, Ireland, Wales, Denmark, Bulgaria, and some other developed economies have ‘banned’ fracking for shale oil. Even in India, ONGC did start with shale gas exploration, but it yielded no results. Exploration projects in other countries have gone in vain and have been abandoned. The only country that seems to be successful in turning it into a profitable venture is the United States of America.

1. Global Stocks Pause at Record Highs; Dollar Slips

Global stocks paused near all-time highs and bonds steadied on Thursday amid mounting concern about fragile economic recoveries and the debate over fiscal support. S&P 500 futures stalled after the underlying gauge closed at another record high. European shares edged lower, pulled down by energy companies, while markets edged up in Asia. Sterling recouped Wednesday’s drop as traders took in stride France’s threat to veto a Brexit deal. And the dollar added to its slump this week that has sent the euro, Australian dollar and the Korean won to their highest levels versus the greenback in more than two years, and the Swiss franc to its strongest since 2015.

Futures on the S&P 500 Index were little changed at early morning New York time.

The Stoxx Europe 600 Index dipped 0.1%.

The MSCI Asia Pacific Index gained 0.6%.

The MSCI Emerging Market Index advanced 0.6%.

2. Morgan Stanley Says Stocks Overbought, Risk Correction

U.S. equities are overbought and at risk of a correction after their recent surge, according to Morgan Stanley’s Mike Wilson. One key risk that most people are overlooking is that Treasury yields continue to march higher, which could create jitters that send stocks lower, said the firm’s chief investment officer. Surging Treasury yields this week amid renewed optimism about a U.S. stimulus program and positive vaccine news are leaving some investors nervous that a higher discount rate may eventually require an adjustment lower in equity valuations with stocks at all-time highs. The S&P 500 Index is coming off a record monthly gain and is trading at valuations last seen at the bursting of the dotcom bubble.

3. Global Oil Benchmark Brent Could Soon Incorporate American Crude

S&P Global Platts is considering adding a key U.S. crude grade to its North Sea benchmark, a move that could transform the way oil prices are set in many parts of the world. The pricing agency has opened consultations on adding West Texas Intermediate Midland crude to the Dated Brent benchmark and is inviting feedback on the proposal until Feb. 5. Dated Brent is used to set more than two-thirds of the world’s physical oil prices and ultimately helps shape the price of Brent oil futures. The move reflects the growing importance of U.S. crude internationally.

4. Covid Drug Prices Need U.S. Controls to Prevent Gouging

The U.S. government should set prices for coronavirus vaccines and therapies to prevent gouging, a coalition of companies and other employers said. Medicare, the health program serving older Americans, should determine fair prices for Covid-19 drugs and inoculations that would also be paid by companies, organizations and individuals, Employers’ Prescription for Affordable Drugs said in a statement. The group cited Gilead’s remdesivir antiviral as an example of an overpriced therapy. Employers are growing increasingly uneasy about their share of the treatment costs for rising numbers of patients with Covid-19, more than 90,000 of whom are now hospitalized in the U.S. alone. Remdesivir, one of the few coronavirus treatments, costs private health plans more than $3,000 per treatment course, the group said.

5. Germany Extends Lockdown; Iran’s 1 Million Cases

The number of coronavirus cases reported in Iran surpassed 1 million on Thursday, the Middle East’s worst outbreak. German Chancellor Angela Merkel extended the nation’s partial lockdown for three more weeks, with the daily death toll at its highest since April. Los Angeles (USA) ordered residents to stay home and businesses that require in-person work to cease operations. The U.S. had its deadliest day ever, with Covid-19 fatalities topping 2,700, according to Johns Hopkins University. Hospitalizations in the country surpassed 100,000 for the first time. Thailand will intensify patrolling at its borders after about a dozen people, who illegally entered the country from neighbouring Myanmar, tested positive for coronavirus.

6. China faces Ticking Debt Bomb in China’s $15 Trillion Bond Market

While defaults were once considered a rare occurrence in China’s bond market. After years of debt-fueled spending, Chinese companies are under increasing pressure. They are trying to cope with unsustainable levels of debt against a backdrop of substantially slower economic growth compared with earlier decades. With Beijing pulling back some of its supportive measures introduced to offset the impact of the pandemic, signs of credit stress are returning. A series of failures among state-linked companies sent shockwaves through the market, throwing doubt on the credit risks of a group of borrowers historically considered to enjoy the implicit guarantee of the state or local governments.

7. France Floats Veto Threat on Brexit Deal as EU Feels Strain

France warned it could veto a trade deal between the U.K. and the European Union if it doesn’t like the terms, piling pressure on the EU negotiating team not to make further concessions as talks build to a climax. At a meeting of the bloc’s 27 ambassadors on Wednesday, the French envoy warned chief Brexit negotiator Michel Barnier of how bad it would look if he brokered a deal only to see it vetoed by EU leaders. Once any deal is done, EU leaders must approve it unanimously if it is to take effect, meaning Barnier has to keep all member states on board.

8. China to Allow Australian Coal Cargo Ashore Despite Ban

China is set to allow a shipment of Australian coal into the country, despite a ban on such imports remaining in place as tensions between Beijing and Canberra escalate. A cargo of 135,000 tons of Australian thermal coal on the vessel Alpha Era, which has been waiting since late May to unload at the southern Chinese port of Fangchenggang, is expected to clear customs and is bound for a local user. It isn’t clear why the cargo is expected to clear customs. The ban on Australian coal, except on the Alpha Era cargo, remained unchanged. The person with knowledge of the Alpha Era said customs didn’t explain why they were processing the cargo.

9. Pandemic Pushed 32 Million People Into Extreme Poverty: UN

The coronavirus pandemic has had a devastating impact on the world’s poorest countries, pushing millions into extreme poverty, according to a United Nations report. More than 32 million additional people in the poorest countries in the world now live on less than INR 150 a day – a direct result of the outbreak, the UN Conference on Trade and Development said Thursday. The economic impact in the Least Developed Countries (LDC) has been far more devastating than the health crisis, it said, with growth prospects cut from 5% to -0.4% this year. That would be the worst economic performance of the 47 LDCs since the third-world debt crisis of the 1980s, the UN said. The abrupt halt in world trade and tourism, and the impact of lockdowns on international migration and remittances, dealt a “ruinous” blow.

10. Saudi Arabia, Qatar Near U.S.-Brokered Deal to End Lengthy Rift

Saudi Arabia and Qatar are nearing a preliminary deal to end a rift that’s dragged on for more than three years, prodded by a Trump administration seeking foreign policy wins during its waning days in the White House. The tentative agreement does not involve the three other Arab countries that also severed diplomatic and trade ties with Qatar in June 2017 — the United Arab Emirates, Bahrain and Egypt. A broader realignment remained a long way off as the underlying issues, such as Doha’s relations with Tehran, remained unresolved. The potential breakthrough follows months of intense diplomacy mediated by Kuwait, which reached fruition with a final push from President Donald Trump’s son-in-law and Middle East envoy Jared Kushner, who visited the Gulf this week. The rapprochement is likely to include reopening air space and land borders, an end to the information war Qatar and Saudi Arabia have waged and other confidence-building steps as part of a detailed plan to gradually rebuild relations.