PwC: Oil prices to drop dramatically due to shale oil

14 May 2013

According to US Energy Information Administration (EIA), the world's most influential analyst in the area of oil prices, the price of oil will rise the coming two decades to $133 per barrel in 2035. The large majority of others analysts, such as analists from large banks or credit agencies, generally predict the same: a gradually increasing oil price. Important drivers are oil scarcity, increasing oil consumption from the maturing emerging markets and lagging growth in renewable energy resources. A recent report from PwC comes to the surprising conclusion that the majority of renowned analysts are wrong. In their thought process they have forgotten about the mega impact van shale oil*.

In the report 'Shale Oil: The Next Energy Revolution' the consultants calculate that the upcoming trend of shale oil will heavily impact the supply and demand of oil. The consulting firm predicts that the production of shale oil could increase to 12% of the total oil production. As a result oil prices will not increase but actually fall. In fact, in the most optimistic scenario of the development of shale oil exploration, oil prices might even drop structurally by up to 40%.


In the EIA-based prediction, the price of oil will come out at $ 133 dollars per barrel in 2035. PwC developed two cases. In the 'reference case' the OPEC respond to increases in shale oil production by maintaining its oil prices around $100 dollars per barrel. In the 'low case' OPEC does not respond by lowering volume of production, so the increased supply leads to a fall of the oil price to around $83 per barrel by 2035.

PwC - Ontwikkeling van Olieprijs

In the reference case, the rise of shale oil leads to a drop in the oil price by 25%. The low case shows a much larger price drop - around 40% by 2035. This amounts to a price per barrel that is $50 cheaper compared to the EIA baseline projection.

Impact on companies

According to PwC the falling oil price will have a big impact on governments and companies. Oil companies should take the falling oil prices into account for their scenario analysis and reassess their portfolios. At the same time they will have to adapt their business models to better suit the smaller scale production needed to produce shale oil.

Shale oil also requires a new way of thinking in government. If governments want to keep their revenues from the extraction of oil up to standard then they should stimulate further unconventional sources. The Big4 firm also expects that shale oil "will have significant impact on geopolitical relations", for example, between the United States, China and the OPEC countries.


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