Michael A. Mehling

On April 22, 2015, CEEPR and the MIT Energy Initiative (MITEI) convened a symposium to address the latest developments in unconventional hydrocarbon exploration, its effects on oil and natural gas markets, and broader geopolitical implications. A small group of distinguished participants from academia, industry, and public policy joined in a candid, in-depth discussion of some of the most pressing issues currently facing the oil and gas sector.

For the first session on “Impacts on Markets & Prices: A New Equilibrium?”, Lutz Kilian of the University of Michigan drew on an ongoing research project with multiple vector autoregressive forecasting models to provide insights on the decline in oil prices since June 2014. A breakdown and analysis of observed forecasting errors served to better understand the (positive) supply and (negative) demand shocks responsible for the decline, and also helped identify different scenarios and their effect on oil prices going forward. Drawing on his earlier work with Morris Adelman at MIT, Michael Lynch of Strategic Energy & Economic Research Inc. followed with an exploration of how Adelman’s work might apply to current trends in oil and gas markets. Through a series of examples, he demonstrated the continued strength of one of Adelman’s central postulations: the perennial conflict between diminishing returns and increasing knowledge of hydrocarbon resources and their extraction will always provide a competitive floor for world oil prices. Matthew Partridge of Statoil and MIT’s John E. Parsons served as discussants for both presentations, inter alia questioning the potential of futures prices to help predict short- and long-term oil price trends.

For the second session, titled “Evolving Supply-side Dynamics: Unconventional Oil and Gas”, Robert Kleinberg of Schlumberger and Philippe Frangules of IHS examined the disruptive role of shale gas and tight oil in the hydrocarbon sector. Frangules shared IHS’ forecasts for oil prices and production levels, drawing attention to factors that make it harder to predict how the market will recalibrate after the current decline. For instance, the ability of producers faced with cash-flow constraints to allocate capital to the highest-return assets within their portfolios – a process known as “high-grading” – has resulted in stable production despite declining capital expenditures. Likewise, drilled-but-uncompleted wells will allow for much shorter response times once prices firm. Kleinberg shed further light on the recovery technologies available for tight oil extraction, linking high annual decline and low recovery rates to the unavailability of secondary and tertiary recovery methods commonly used in conventional oil wells. Continued improvements in production efficiency could be dwarfed by a breakthrough in production enhancement technologies,

which would free up massive amounts of light and medium crude oil. Kleinberg went on to describe the implications of rapid growth in ethane production, and explained how the resulting price declines are fundamentally altering production costs in the petrochemical industry. Gordon Kaufmann and Christopher Knittel, both of MIT, followed with a number of observations that stimulated lively discussion.

In the third and final session on “The New Geopolitics of Oil & Gas”, MIT’s Sergey Paltsev traced a number of recent developments around the globe driven by energy geopolitics, such as European efforts to reduce gas imports from Russia in the wake of the conflict in Crimea, or Russia’s “Eurasian Strategy” and pivot to new markets such as China. Together with aspirations to reduce global carbon emissions, Paltsev argued, these political uncertainties will continue to shape global oil and gas markets. Meghan O’Sullivan of Harvard University then highlighted how changing geographies of oil and gas production have fundamentally altered the geopolitical balance in the world. U.S. shale gas and tight oil extraction, for instance, has provided the “single strongest antidote to narratives of American decline”, while an oil price below the fiscal breakeven point of many Middle Eastern producers may completely redefine the current social contract in these countries. Gilbert Metcalf of Tufts University and Robert Ritz of Cambridge University responded with comments and questions before opening for a discussion with the audience.

A recurrent theme throughout the symposium’s three sessions was the pervasive role of uncertainty – uncertainty about future hydrocarbon production and consumption patterns, uncertainty about evolving markets and trade flows, but also domestic and foreign policy uncertainty. How best to navigate such uncertainty in an increasingly complex market environment will remain one of many attendant challenges for future research at CEEPR.

About The Authors

Michael Mehling is Deputy Director of the MIT Center for Energy and Environmental Policy Research and a Professor at the University of Strathclyde Law School. In his work, Dr. Mehling focuses on comparative and international climate policy design and implementation, including its intersections with environmental, energy, and trade policy. On these topics, he has coordinated research projects for international organizations, government agencies, private companies and civil society organizations in North America, Europe, and the developing world. He has advised decision makers in over a dozen countries, testified before or briefed legislators in the United States, the United Kingdom, and the European Union, and served as an expert in several climate litigation cases.