WORLD OIL PRODUCTION TREND:
HOW US SHALE OIL PRODUCTION CHANGES THE WORLD TREND
Douglas B. Reynolds, University of Alaska Fairbanks, (907) 474-6531, DBReynolds@Alaska.Edu
Key Words: World Oil Production, Shale Oil, Production Trends
Overview
The US has seemingly huge reserves of shale gas and shale oil which look to make the US a net energy exporter
within ten years. However, these new reserves need to be considered in the context of the overall world energy
supplies rather than as a simple North American phenomenon.
First, natural gas and oil need to be looked at as separate energy resources that are under separate markets and
that are not perfect substitutes for each other. Next, it must be understood that the reserves of shale oil look to be a
lot less in relative terms than the reserves of shale gas as evidenced by the price of natural gas in the US compared to
the price of oil. This suggests that US supplies of shale oil will be limited. Finally, we can look at the level of shale
oil production the US can attain relative to world oil production. Thus, the US shale oil production needs to be
looked at from the point of view of how it changes the world oil production trend rather than just how it changes the
US oil production trend.
Once we consider the US shale oil production in relation to world production, we can try to forecast the world
trend. Two interesting comparisons of the world oil production trend to other trends are the former Soviet Union’s
oil production trend and the U.S. oil production trend once Alaskan North Slope oil started producing in 1977. If we
compare the current world oil production trend to those previous trends using indexed trends, then we can get an
idea of what may happen to world oil production in the future.
Methodology
This paper will estimate the long run trend in world oil production using a polynomial power function of
production versus cumulative production plus cumulative production to the one plus lambda. The estimate will be
made using three points of reference, 1859, 1973 and 2005, where Qtrend = ao* CQ - a1*CQ(1+λ) be estimated. The
price of oil will be compared to the difference between actual oil production and the estimated trend in order to
analyse the price of oil versus oil supply and demand fundamentals:
Pt = ao +a1* Qt/Qtrend
where Pt is the oil price; Qt is actual world production and Qtrend is the estimated trend up until 2009.
While the Qtrend variable may seem ad-hoc, it in fact tracts world oil prices better than any other variable. The
difference in price will be reformulated as an ARDL format and dummy variables for the 1973, the 1979 and the
2005 shock points, and using an error-correction version with a linear combination of lagged variables.
Going further, part of the very recent change in the world trend of oil production since 2009 is due to US shale
oil production. Although the exact shale oil reserves for the US and the world are yet to be determined it may be
possible to forecast them. One way to forecast the reserves is to use a trend of oil production versus cumulative
production beyond 2009. Based on the past trend and a new change in trend since 2009, a dummy variable, we can
make a simple forecast of what may be future world oil supplies which include shale oil supplies. The new trend
can be estimated using the pre-2009 trend and data since 2009.
Once simple forecast is done, we can also be compared the simple forecast with two other interesting change of
trend histories: the former Soviet Union’s oil production trend up to 1996 and the early US oil production trend
including Alaska in the 1970s. This comparison will be carried out using a unitized indexation of production versus
cumulative production plus cumulative production to the one plus lambda model to see what could happen to the
world’s oil production in the future. The comparisons will be standardized and matched using a geometric statistical
method.
One other interesting analysis will be looked at which is the US energy independence report of the 1970s and
how that report did not accurately forecast US production. That report gives a forth forecast of the future if we
index its forecast and the then current state of US oil production with the world production rate.
Results
This paper will shows one possible future forecast of oil production using the method of matching a series of
forecasts for world oil production if US shale oil prospects are successful. The most probable trend can then be
compared to world GDP business as usual growth trends to see how oil prices will change over time.
Conclusions
The results show a series of possible oil price scenarios from which to plan economic adjustments to oil prices.
The results suggest that US shale oil will not greatly reduce the need for US policies to defend and stabilize the
Middle East. However, US exports of oil and energy in general could cause the US to be subject to the resource
curse.
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