How unconventional oil changes the world

At the same time, they have not been able to coalesce around the efforts to boost demand.

The oil world is a completely different story and you have pressures from different directions right now. On the one hand, you have a surge in opportunities for development in countries where geopolitical risks are relatively low. In the US, Canada, and Brazil you may need to still worry about regulatory changes, but you are not worried that terrorists will come and capture your workers.

At the same time, for a lot of the companies, that is not enough and they are still looking globally, and they still face challenges from nationalism and unstable regimes. On top of that, they are entering a period in which there is probably more uncertainty in prices than there has been for a long time. You have this collision of growth and supply from
outside OPEC, together with potential Iraqi growth and substantial investment from within OPEC that really opens up the possibility of a big, if temporary, price drop in the next five or
so years. That complicates the outlook for companies, on top of everything else.

James Stafford: Really? You believe that prices could drop in the future?

Michael Levi: I think prices could drop substantially. If you look at the most recent IEA report or the most recent OPEC outlook, you see that if all currently planned investment goes ahead, then at prices resembling current ones, supply would greatly outstrip demand.

Either countries will pull back with production and investment in OPEC and allow supply to match demand at relatively high prices--and I think that is the most likely outcome--or they will not be able to decide who has to pull back, and there will be an excess of supply on the market that pushes prices down quickly. That is self-correcting, because low prices cannot sustain the big gains in North American production. But you can still have temporarily low prices that really shake things up for some producers, depending on the properties of their investment.

James Stafford: Speaking of the IEA report, predictions that the US could pass Saudi Arabia to become the world's largest oil producer by 2017 have come under a lot of criticism. What do you think of the IEA's predictive mathematics?

Michael Levi: Predictions are always wrong in one way or another, and I am not going to second-guess those who have thought to a much greater depth in these analyses. There is a range of estimates out there, but the IEA ones are relatively modest.

The bigger issue is: what are the implications? Everyone likes to talk about how their projections show that the world is being reborn anew, and will be fundamentally different from what it was in the past.

There is a temptation to oversell, and I think it is reasonable that people react negatively to efforts to oversell the consequences of the changes going on in energy.

James Stafford: What are your views on the shale boom? Do you believe it can live up to the hype?

Michael Levi: It depends on what hype we are talking about. I think the shale boom is for real. I think that a lot of the criticism that we do not know long-term production rates and so on are important to look at. But even if you assume that returns on wells are substantially lower than most people think they are right now, our projected output is still quite high, because producers' economics are dependent primarily on what happens in first few years after they drill. We know roughly what happens in the first years after producers drill.