Forget America's fiscal cliff, Europe's currency troubles or the emerging-markets slowdown. The most important story in the global economy today may well be some good news that isn't yet making as many headlines – the coming surge in oil production around the world.
Until very recently, our collective assumption was that oil was running out. That was partly a matter of what seemed like geological common sense. It took millions of years for the Earth to crush plankton into fossil fuels; it is logical to think that it would take millions of years to create more. The rise of the emerging markets, with their energy-hungry billions, was a further reason it seemed obvious that we would have less oil and gas in 2020 than we do today.
Obvious – but wrong. Thanks in part to technologies such as horizontal drilling and hydraulic fracking, we are entering a new age of abundant oil. As the energy expert Leonardo Maugeri contends in a recent report published by the Belfer Center at the John F. Kennedy School of Government at Harvard, "contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption."
Mr. Maugeri, a research fellow at the Belfer Center and a former oil industry executive, bases that assertion on a field-by-field analysis of most of the major oil exploration and development projects in the world. He concludes that "by 2020, the world's oil production capacity could be more than 110 million barrels per day, an increase of almost 20 per cent." Four countries will lead the coming oil boom: Iraq, the United States, Canada and Brazil.
Much of the "new" oil is coming on stream thanks to a technology revolution that has put hard-to-extract deposits within reach: Canada's oil sands, U.S. shale oil, Brazil's presalt oil.
"The extraction technologies are not new," Mr. Maugeri explains in the report, "but the combination of technologies used to exploit shale and tight oils has evolved. The technology can also be used to reopen and recover more oil from conventional, established oil fields."
Mr. Maugeri thinks the tipping point will be 2015. Until then, the oil market will be "highly volatile" and "prone to extreme movements in opposite directions." But after 2015, Mr. Maugeri predicts a "glut of oil," which could lead to a fall, or even a "collapse," in prices.
At a time when the global meme is of America's inevitable economic decline, the surge in oil supply capacity is an important contrarian indicator. Mr. Maugeri calculates that the United States "could conceivably produce up to 65 per cent of its oil consumption needs domestically." That national energy boom is already providing a powerful economic stimulus in some parts of the country – just look at North Dakota. Crucially, at a time when one of the biggest social and political problems in the U.S. is the disappearance of well-paid, blue-collar work, particularly for men, oil patch jobs fill that void.
Equally significant is the impact of oil on the most important human problem of our times: the environment. The sources of oil that will fuel the coming boom are harder to reach than the supplies of the 20th century, and the technologies required to extract them are more invasive. That will be one fault line in what is sure to be the escalating battle between environmentalists and the oil industry.
The implications for the climate change debate are even more fraught. Until now, the arithmetic of oil supply and the agenda of environmentalists conveniently dovetailed. Since we were running out of oil anyway, environmentally motivated efforts to limit fossil fuel consumption and increase our use of renewable energy boasted the additional virtue of being inevitable. In an age of abundant oil, those economically utilitarian arguments lose their power.
For environmentalists, and for the liberal political parties with which they are usually aligned, that poses a serious challenge. The temptation will be to oppose new oil production projects indiscriminately. That instinct could be politically dangerous. Political progress in combatting climate change has been slow, but the battle for hearts and minds, especially of the younger generation, is being won. That political capital can be lost in an instant if the environmental movement allows itself to be equated with opposition to one of the lone sources of growth – and of good blue-collar jobs – at a time of global economic stagnation.
A final conclusion to draw from the next oil revolution is a little more existential. This is yet another reminder that what both common sense and expert consensus assure us to be true very often isn't. It was obvious that efficient markets worked and financial deregulation would stimulate economic growth, until the financial crisis and the subsequent international economic recession. It was equally apparent that we were running out of oil – until we weren't.