Hydraulic Fracturing has revolutionized world oil and gas market. United States have dramatically increased oil and gas production due to the new fracturing technology was introduced, and has become an exporter of natural gas and oil. The effect of the hydraulic fracturing can be viewed in two perspectives: through a classic supply and demand theory and through the current situation in the international oil market. The results can be quite different.
According to the classical theory, fracturing has increased the production of oil. Increased supply inevitably leads to price decrease. Furthermore, fracturing has decreased the cost of oil extraction, and has pushed the prices even further down. Oil prices have gone down worldwide and have reached the $30 per barrel mark as a confirmation of the supply/demand theory.
At the same time, there are other factors that influence the oil prices. Slowing down of the Chinese economy have seriously decreased the global demand for oil even without fracturing effect. Overproduction has created a storage problem. The lack of storage capacity has pushed the prices even further down, because if there is no place to store, the only option is to sell at whatever price is achievable.
As the oil prices go down, fracturing becomes less profitable. According to the Economist, below $40 per barrel, shale production generates loss (The Economist, 2016). By creating increase in supply and pushing oil prices down, fracturing industry can kill itself by going unprofitable. Since traditional oil extraction is more expensive, if shale extraction shuts down, it will inevitably lead to price increase and re-distribution of the market shares between the major oil producing countries.
Hydraulic fracturing has pushed the oil prices down, but at a certain level shale production becomes unprofitable and can create an opposite trend and market share re-distribution.
References.
The Economist. DUC and Cover. Rising oil prices will not quickly rescue the beleaguered shale industry. 2014. Retrieved May 12, 2016 from: http://www.economist.com/news/business/21694522-rising-oil-prices-will-not-quickly-rescue-beleaguered-shale-industry-duc-and-cover
