The Shale Revolution and the Dynamics of the Oil Market

Abstract

We build and estimate a dynamic, structural model of the world oil market to quantify the impact of the shale revolution. We model the shale revolution as a decrease in shale production costs and find that the resultant increase in shale production lowers oil prices by 24% in the short run and 48% once the shale oil transition is complete. Current oil price volatility is lowered by 8 to 23% depending on the horizon. We also find OPEC Core acts to keep its market share constant in the face of the dramatic increase in shale production.