How Shale Gas Has Hedged The Global Economy Against Oil Price Volatility?

After the 1980s, there has been a sustained rise in the supply-demand mismatch for energy, in particular, for gasoline and natural gas. With massive rise in Chinese thirst for energy, and several other developing economies also joining in the party, oil prices skyrocketed earlier this decade. However, with the recent advances in shale gas production, and increasing self reliance of United Stated in energy, prospects for 2018 look much better...
How Shale Gas has hedged the Global Economy against Oil Price Volatility?
Source - Wikimedia Commons (https://commons.wikimedia.org/wiki/File%3AUS_Natural_Gas_Production_1990-2040.jpg)

Energy prices have become so intricately linked with the health of global economy, that their rise is bound to create many flutters. As gas prices began to creep up during the earlier part of this decade, with problems in the Middle East still far from over, they posed many challenges for the economic health of the whole world. Just when we were desperately awaiting a breakthrough that can relieve us from the oil price burden, the almost revolutionary growth of shale gas extraction industry in the last few years has come as excellent news.

Links between Gas Prices & Economic Health

The

health of the global economy is strongly related to the gas prices. Corporate profits as well as consumer welfare gets adversely affected when the prices of gas, and along with it, prices of all other commodities rise. There are indirect links too, such as the impact of oil prices on trade balances - the rising gas prices had become the single biggest contributor to the US international trade deficit in recent times, and contributed to the 2007 global economic crisis.

Inflation is usually the first consequence of rise in oil prices, even though the commonly cited core inflation indices do not always include price of food and energy, and so may not be reflective of the full impact of gas prices on household budget. The principles of economics tell us that when the prices rise, the consumption and falls, as people may not be able to buy as much as they did earlier. When the demands are elastic, the impact would be more, whereas if the demands are inelastic the impact may be much lesser. However, statistics strongly suggest that the demand for oil is relatively inelastic - it remains more or less unchanged irrespective of the price, which makes oil prices an important player in inflation, and suppresses economic growth.

Shale Gas Production Rise in United States

It is here that the shale gas revolution in the United States has come in as a great relief for the global economy. With shale gas extracted by hydraulic fracturing contributing as much as half of the total natural gas production in the United States, and with new reserves getting confirmed at a rapid pace, the prospects of sustained self reliance of United Stated in energy serves as a great dampener for speculative price rise in energy products.

Shale gas was extracted first in the nineteenth century, but the technology had not been feasible for cost effective commercial production till recently. The existing technology for gas extraction is based on hydraulic fracturing. This has

resulted in cost effectively production of natural gas, leading to rise in production. By 2015, the daily production of shale gas had risen to over forty billion cubic feet. It amounted to doubling of production within a period of four years, and made up over fifty five percent of the total natural gas production in United States.

As a result of this rising production of shale gas, the US economy has almost become self reliant, leading to a fall in international demand for oil.

Rising Global Oil Price leads to Rise in Shale Gas Production

One of the peculiar features of energy prices is their link with global oil prices. As early as in the seventies, when the world received its first major oil price shock, there was a thrust on finding viable alternative sources of energy. However, with a fall of oil price in the eighties killed all such initiatives. The rise of oil price earlier this decade actually pushed the shale gas production. The subsequent fall of oil prices have had adverse impact on shale gas production, slowing its progress, but only a bit.

A new and sustainable equilibrium seems to have come into existence between global oil prices and US shale gas production. So, when the oil prices rise, the increased incentive for shale industry leads to a further rise in production. In fact, since the commodity prices are dependent upon expectations to a large extent, the expectation of shale gas production can by itself act as a dampener on speculative oil price rise.

This allows the shale gas production to act as a hedge against rise in oil prices.

Energy Prospects Undergoing Major Changes

In the meanwhile, the energy sector is also undergoing significant changes. There has been a great emphasis on renewable energy in recent times. While the interest in nuclear energy is somewhat waning, there has been a lot of progress in wind energy. However, the greatest break-through is in solar energy, which has the potential to take care of all energy needs of mankind. Equally important have been the developments in use and storage of electricity, which can establish solar energy as the mainstay in times to come.

But that will take its own time. In the meanwhile, shale gas production provides an important cushion against the rising oil prices!



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