The world is witnessing a new war between “Conventional” energy producers -mainly states representing the Organization of Petroleum Exporting Countries (OPEC) – and the new “Unconventional” energy producers in the form of shale Oil or Gas, in particular the United States of America. Shale Oil and Gas is defined as: “the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside”. This new technique is therefore acquiring a share of the energy market on one hand, in contrast to Conventional Oil producing states that are not willing to relinquish their dominance on the global energy markets.
Conventional Oil requires the use of traditional techniques for extracting and producing petroleum in contrast to Unconventional Oil that requires new, highly energy intensive production techniques and new processes because of their inaccessible placements or unusual compositions. Formed from ancient sea basins millions of years ago, natural Shale Gas and Oil reserves were trapped in hard dense deposits of Shale. Shale fracking is the process of extraction of Oil and Gas reserves from these Shale rocks.
The world Oil supply has increased due to the US fracking boom. Yet, the lack of demand because of the global economic growth that is currently slowing, led to a sharp fall in Oil prices. What is more, OPEC has refused to lower production despite the oversupply of the world market in order to keep their own market share. As a consequence, OPEC countries are losing market share to Unconventional Oil producers.
However, there is a strategy behind this. Based on the assumption that Unconventional production is more costly, Oil production techniques from large conventional reservoirs will always be cheaper. Therefore, as the price falls, Unconventional producers will eventually lose the capability to produce oil and OPEC will retake the lost market share.
The Cost of Oil Production:
Conventional wells operate on extremely long cycles that help account for the extreme volatility in Oil prices. Companies only invest when the forecast of future prices is far above the total outlay of fixed costs, which constitutes the “upfront investment required finding the Oil and installing the well” and marginal ones, which is the “costs of Oil extraction on a yearly basis mainly labor and electricity”. These companies aim at making big profits. Almost all conventional wells will keep pumping when prices drop because the marginal costs of extracting the crude is lower than the prices fetched on the world market.
When it comes to Unconventional Oil, Shale wells have an extremely short life. Producers must constantly drill new wells to generate constant or increasing revenues since their existing wells span a mere half-life according to the industry standards. Fracking is similar to mining as producers of Shale Oil and Gas need to replace the production they lost last year through the drilling of new wells. Many of Shale producers are heavily indebted because of the constant need to drill while others are selling equity or junk bonds to raise more money. Fracking could moderate price fluctuations, even with the short life of Shale wells. However, when Oil prices decrease significantly, Shale producers will not have the required funding to keep drilling new wells. 
Nevertheless, OPEC’s strategy of decreasing Oil prices based on the assumption that Oil Shale producers will not have the capability to proceed is not entirely correct. Companies investing in Shale Oil and Gas will slow down but not stop as prices decline. Technology evolves and operations will be restarted again once prices recover. The equipment will not vanish and the labor force can be rapidly assembled, not to mention that the institutional knowledge will also remain.
Fate of the Fracking Revolution:
The US fracking revolution could have a transformational effect on global energy in case it expands globally. If the emerging countries like China or if Europe for instance starts fracking, the cost of Oil will fall as new Oil supplies will appear, decreasing prices whilst reorganizing world energy markets. It’s not a fight between US shale Oil and OPEC but rather a battle between OPEC and future Shale.
Currently, Russia, China, Australia, Argentina and Mexico hold the richest Shale reserves and are looking to use the same technology practiced in the US. European countries such as Poland and Ukraine are competing for investment; Bulgaria and France have established moratoria on fracking while Britain and Germany are debating. For China, the preferential allocation of prospective areas to national monopolists combined with high barriers to entry of companies with better technologies resulted in a lack of success in accessing Shale gas until now. Even, the US production of Shale remained concentrated in central states because of environmental concerns.
The battle between Conventional and Unconventional Oil producers over the dominance of the global energy markets has just started. The involvement of further countries in the new Shale Oil and Gas practices along with the appearance of more sophisticated technologies that would result in exploration and exploitation of further conventional and unconventional Oil and Gas fields and areas respectively will raise the stakes for all the countries involved and reshape the current energy markets, creating an energy governance crisis such as the current.