IEEJ： October 2013ｃ IEEJ 2013○Special Bulletin
A Japanese Perspective on the International Energy Landscape (148)

October 31, 2013

Analyzing Changes Induced by the Shale Revolution
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
This report's title is taken from the subtitle for the "Asia/World Energy Outlook 2013"(hereinafter referred to as the “Outlook”) that the Institute of Energy Economics, Japan, published onOctober 21. As indicated by the subtitle, the Outlook's focuses include an analysis on how
differences in degrees of progress in developing shale gas/oil and other unconventional energy
resources would impact the global energy system and the world economy. As did the past Outlook
reports, this latest one also analyzed the Reference Scenario in which existing global energy supply
and demand trends will continue and the Advance Technology Scenario in which advanced energy
technologies to promote energy security and environmental protection will be diffused and used tothe maximum on both the supply and demand sides. By comparing the two scenarios, the Outlook
looked into details of energy conservation effects and carbon dioxide emission reduction induced by
the promotion of advanced technology deployment. But the most important point of the Outlook isthat the report provides the Enhanced Unconventional Resource Development (EURD) Scenario, in
which unconventional energy resources development will make substantial progress in the UnitedStates as well as in the rest of the world, and analyzes the impacts or implications of the progress.
(For details, see http://eneken.ieej.or.jp/whatsnew_op/131021teireiken.html)
I here do not detail the EURD Scenario. Instead, I would like to analyze changes inducedby the shale revolution, as indicated in the title. In the EURD Scenario, technological, economic,institutional and all other conditions for promoting unconventional energy resources development
are assumed to be met to substantially expand unconventional oil and gas production. For example,production in 2040 will substantially increase from 7.4 million barrels per day in the Reference
Scenario to 26 million b/d in the EURD Scenario for unconventional oil and from 1.4 trillion cubic
meters (CM) to 2.2 trillion CM for unconventional natural gas. The substantial production expansion
will ease the supply-demand balance in oil and gas markets, leading crude oil and natural gas prices
to decline from the Reference Scenario to the EURD Scenario. How should we interpret the changes
induced by the shale revolution? Answers may be divided into three points -- (1) impacts oncompetition between primary energy sources, (2) impacts on international energy trade patterns and(3) macroeconomic impacts on major countries.
Under the first impacts, gas will become a “winner” in a competition between energy
sources in the EURD Scenario. Gas will increase its competitiveness through a price reduction,1

IEEJ： October 2013ｃ IEEJ 2013
○allowing gas demand to expand in various areas. Among them, the power generation sector will posta remarkable increase in gas demand. Coal will be most affected among energy sources in the EURD
Scenario. Coal demand will slacken. Nuclear and renewable energy development will also beaffected by gas's expansion by some degree. Growth in nuclear and renewable energy consumption
may slightly decelerate. In this way, the substantial expansion of unconventional gas production andthe gas price decline will affect the global energy portfolio. Meanwhile, the substantial expansion of
unconventional oil will help reduce crude oil prices. But oil demand's comparatively low elasticity toprices and the transport sector's switch from oil to gas amid gas price reduction will lead oil demand
to decline somewhat instead of increasing. Nevertheless, the substantial expansion of unconventional
oil production in the absence of any demand increase will affect international trade structurally.
The second impacts will greatly change the net oil and gas import positions of major
regions. In the EURD Scenario, North America will substantially expand net oil and gas exports. As
far as oil alone is concerned, North America will move from a net import position in the Reference
Scenario to a net export position in the EURD Scenario in 2040. Latin America and Oceania will
also substantially expand net oil and gas exports and be positioned as major exporters under theEURD Scenario. Given the abovementioned supply and demand changes, present major exporters
including the Middle East and the Former Soviet Union will see reduced net exports in the EURD
Scenario than in the Reference Scenario. Particularly, the Middle East's net oil exports in the EURD
Scenario in 2040 will be 8 million barrels per day less than in the Reference Scenario. Given theeasier supply-demand relationship to lower prices, as well as the lower net exports, the enhanced
development of unconventional oil and gas resources will have a great impact on oil and gas export
revenues in the Middle East and the Former Soviet Union.
The third impacts in major regions will be patchy, depending on the degrees ofunconventional resources development. U.S. GDP in the EURD Scenario in 2040 will be 1.4% morethan in the Reference Scenario. Even in the Reference Scenario, the United States will havedeveloped unconventional gas and oil resources ahead of other countries. The shale revolution's
cumulative effects including those taken into account in the Reference Scenario will push up U.S.
GDP by 4% in 2040. Effects of global economic growth, including the U.S. expansion, andunconventional energy resources development will raise Chinese GDP by 1.9% from the Reference
Scenario to the EURD Scenario. The positive effects of global economic growth and oil and gas
price drops will increase Japanese GDP by 1.1%. But price declines and lower net exports will
reduce GDP in 2040 by 4.1% from the Reference Scenario to the EURD Scenario for the Middle
East and by 2.3% for the Former Soviet Union. In this way, the enhancement of unconventional
resources development will widely impact energy supply and demand and macroeconomic profiles,
inducing various changes in relative relations between economic power and national power, ininternational relations and in international orders.
This analysis only dealt with differences between and effects of multiple scenarios basedon bold assumptions regarding the degree of unconventional resources development. In fact, we2

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○must acknowledge that the future course of unconventional resources development is very uncertain.
Although the latest Outlook compared the Reference Scenario with the EURD Scenario where
unconventional resources development will make substantial progress, we cannot deny a possible
stalemate in the development. How such stalemate would affect the global energy system andeconomy would also be a matter of great interest to us. We must consider future strategies andpolicies while remembering that uncertainties exist not only with regard to the future course of
unconventional resources development but also concerning other key matters that can greatly impact
the global energy situation.
Contact: report@tky.ieej.or.jp
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