Center for Strategic Communication

Last week Harvard Kennedy School’s Belfer Center Research Fellow Leonardo Maugeri has released a study entitled “Oil- The Next Revolution,” which delved into the future of oil production and pricing. The research data demonstrate an “explosion of US output,” challenging notion that oil production has reached a plateau or is destined for decline.

Maugeri is a former manager of Eni, Italy’s largest industrial company, which focuses on oil and natural gas production. More recently he has taken a role as Research Fellow at Harvard’s Kennedy School. Maugeri has written extensively on public misconceptions surrounding peak oil, and is widely considered one of the world’s foremost experts on oil and gas.

The study finds that a “technological revolution brought about by the combined use of horizontal drilling and hydraulic fracturing” is catalyzing a new era in oil. These new technologies will allow companies to tap into oil resources previously unattainable such as Canadian tar sands and Brazilian pre-salt oil.

Maugeri believes these innovations have led to “the most important revolution in the oil sector in decades.” Indications of the possibilities surrounding unconventional production can be seen in the Bakken/Three Forks region in North Dakota and Montana, which are a potential “big Persian Gulf producing country in the US.”

Maugeri’s research works in tandem with others who dispel the notion of peak oil such as Daniel Yergin and Liam Denning, asserting that despite public perception oil is not in short supply. Innovation coupled with copious amounts of available reserves – including 4mbd spare capacity that Maugeri believes could absorb a major disruption from Iran – prevents oil from vanishing.

But there are still huge obstacles for those wanting to invest in oil

The only factors that can explain high oil prices at the moment are above ground not beneath it according to Maugeri. Geopolitical and psychological impacts, particularly fears of a crisis with Iran and a belief that oil is still a scarce commodity, have meant that benchmark crude Brent oil today sells for $96.52. This is well above marginal production costs.

The research suggests that a plethora of factors, particularly market instability, will make the oil market “highly volatile until 2015.” The possibility of prices fluctuating due to supply-demand factors and geopolitical tensions gives little motivation for financial investors to formulate sound investment strategies in oil or gas.

What we can conclude

Maugeri admits that his predictions are “subject to a significant margin of error.” But when taking into account untapped opportunities in the Arctic and New Zealand-owned Ross Sea (which has some of the world’s largest resources outside of Saudi Arabia), it is not realistic to deduce that oil will simply disappear consequent to our gluttony for this finite resource. Earlier this year Citigroup announced what Maugeri’s research infers: that our traditional notion of peak oil is dead.

Instead we must now be asking at what point do costs associated with oil production, particularly as extraction difficulty and catastrophe risks increase, exceed marketability.

Ultimately it will be a concurrence of the market and the ingenuity of government policies that will lead our transition away from fossil fuels to renewable energy. With Maugeri noting “the age of cheap oil is probably behind us” and renewable energy making huge strides, our much-needed transition toward more sustainable energy sources is well under way.