Gas, oil prices restrained as shale crude tapped

Oil obtained from fracking is transferred into a

Oil obtained from fracking is transferred into a tanker truck in North Dakota on Oct. 13, 2011. (Credit: Bloomberg News)

Long Islanders paying $3.80 a gallon for regular gasoline and $4 for heating oil might be skeptical, but experts say fuel from shale formations in North Dakota and other states will put downward pressure on prices for years to come.

The costs of gas and heating oil have risen by 13 percent and 21 percent respectively in five years, squeezing pocketbooks during a period of recession and troubled economic recovery marked by unemployment as high as 8.3 percent on the Island, home prices that fell as much as 21 percent from their peak in 2007 and major employers such as Northrop Grumman and OSI Pharmaceuticals cutting good jobs or leaving altogether.

Now, a new American oil boom is changing the rules of the world petroleum game, say experts, reducing OPEC's influence on the market, lessening the impact of political upheavals on prices and cutting America's dependence on foreign fuels. U.S. crude from the Midwest is causing what the usually staid International Energy Agency, a Paris-based advisory group, called "shock waves . . . reaching virtually all recesses of the global oil market."

If experts are right, the result could be lower prices for Long Islanders or at least smaller increases in years to come.

The key is an environmentally controversial method of extracting oil from thousands of feet underground, known as high-volume hydraulic fracturing -- fracking for short. Perfected in the early 1980s in Texas, it's been employed on a large scale since 2000 and involves the injection of water, chemicals and sand at high pressure to "fracture" formations of shale.

Fracturing the fine-grained sedimentary rock creates fissures that free the oil and natural gas within the rock and allow it to flow up the well.

 

Oil and gas deposits in U.S.Major formations -- there are about 20 in this country -- include the Eagle Ford shale fields of south Texas and the Bakken formation in North Dakota's Badlands. They also underlay parts of Montana, Nebraska, Wyoming, Eastern Colorado, Pennsylvania and upstate New York.

In this state, the Marcellus Shale formation is believed to contain large volumes of natural gas, though not much oil. It's been untapped so far because of environmental opposition. Both sides in the controversy are awaiting a decision from Gov. Andrew M. Cuomo on whether to permit fracking.

Despite high prices at the gas pumps and for heating oil, experts say oil from shale formations already is saving motorists and homeowners money. Carl Larry, president of Oil Outlooks and Opinions, a trading and investment newsletter, estimates that, without the new oil, the price for U.S. crude oil would be about $110 a barrel. It settled Friday at $97.85 on the New York Mercantile Exchange.

Andy Lipow, president of Houston consulting company Lipow Oil Associates LLC, agrees, and says that would mean gasoline prices about 7 cents a gallon higher than they are now. Regular averaged $3.802 on Friday in Nassau and Suffolk, the AAA said. Heating oil from full-service retailers on Long Island averaged $4.21 a gallon at the end of the heating season in March, the state said.

Some of the benefit to Long Island is indirect because, for logistical reasons, the U.S. East Coast depends heavily on gasoline produced from more expensive crude oil that is either refined in foreign countries or imported from abroad to East Coast refineries. That crude is priced to a European benchmark grade known as Brent crude. Brent cost $105.96 a barrel Friday and experts say that, too, would be more expensive without the new shale crude.

The foreign dependency results partly from a shortage of East Coast refinery capacity in relation to the region's dense population, and partly because petroleum infrastructure bottlenecks restrict the amount of cheaper crude from the U.S. interior that can reach the region.

Some gasoline reaches the East Coast from Gulf of Mexico refineries via the Colonial Pipeline system, but there are no east-west pipelines carrying crude oil, according to a report by the Belfer Center for Science and International Affairs of Harvard's Kennedy School of Government.

But eventually, more gasoline and heating oil made from shale crude will be coming to Long Island, having a more direct impact on prices. Experts note that new rail facilities being constructed are allowing more crude oil from the shale regions to reach East Coast refineries.

In a short-term forecast last month, the U.S. Energy Department predicted gasoline prices nationally would average $3.39 a gallon next year -- 11 cents less than its estimated average for this year.

 

Pushing prices down

"Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption," the Belfer report said last year. "This could lead to a glut of overproduction and a steep dip in oil prices."

The federal government forecasts U.S. crude oil output from shale formations will surge from 2 million barrels a day last year to a peak of 2.8 million barrels a day in 2020. That would boost total U.S. oil production from 6.8 million barrels a day this year to 7.5 million barrels a day in 2020. The world produces about 75 million barrels a day now.

As world demand for energy rises, particularly from developing nations, no one is forecasting sharp declines in fuel prices.

"I don't think anyone should be fooled into thinking we're going to see $1-a-gallon gas or even $2," said Lipow. Oil from shale "will help temper growth in prices."

Also helping to keep the lid on prices is falling demand for gasoline in this country, as cars become more efficient and people drive them less -- changes driven by gasoline prices that have more than doubled since 2000.

"There's something happening out there -- a combination of technology, behavior, urbanization -- people working from home," said Tom Kloza, chief oil analyst for the Oil Price Information Service in Wall, N.J.

Meanwhile, thanks to shale finds, natural gas prices, at about $4 per million British thermal units, are about a third of the $13 per Btu they commanded at their most recent peak, in 2008.

The new gas is expected to make the United States a net exporter of the clean-burning fuel around 2020 and has led to lower prices for heating and electrical generation and reduced the cost of manufacturing chemicals and other products that require heat in their processes.

Experts say the lower prices will encourage more conversions from oil to natural gas by commercial and residential users, further reducing demand for oil.

In New York, though, then-Gov. David A. Paterson imposed a moratorium on high-volume fracking in 2008, and the state environmental conservation and health departments continue to study the potential impacts.

Environmentalists have raised concerns about contamination of drinking water from the chemicals used in fracking and the methane gas that is released. Fracking supporters say environmentalists' concerns are unfounded and overstated.

 

Other factors at playThere are other caveats to the promise of shale oil and gas. Most projections are based on estimates of what lies beneath the ground -- estimates that could be overly optimistic.

Some U.S. refineries, geared up for "heavy sour" crude from abroad, will need major overhauls to use the high-quality "light, sweet" oil from shale, said the Belfer report.

More unrest in the Middle East could send crude oil prices skyrocketing, with speculators betting on supply interruptions -- even if disruptions never materialize, experts say. On Friday, for example, oil prices rose on news that President Barack Obama had authorized the provision of small arms and ammunition to help Syrian rebels.

Such run-ups translate into higher pump prices for gasoline and higher heating costs. If crude prices fall dramatically, the Organization of Petroleum Exporting Countries, which still controls 40 percent of crude oil production, could cut its output in an effort to support prices.

If OPEC didn't, a collapse worldwide in oil prices could discourage more drilling and production, said Lipow.

Still, the Belfer report said, "The age of 'cheap oil' is probably behind us, but it is still uncertain what the future level of oil prices might be. Technology may turn today's expensive oil into tomorrow's cheap oil."

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