What Is Shale Oil?

Shale oil is a type of unconventional oil found in shale formations that must be hydraulically fractured to extract the oil. Primary uses include heating oil, marine fuel, and the production of various chemicals. Shale oil can, in fact, refer to two types of oil: crude oil that is found within shale formations or oil that is extracted from oil shale.

Shale oil and shale gas formations can be found around the world. Countries with the largest amount of technically recoverable shale oil resources include Russia, the United States, China, Argentina, and Libya.

In the United States, the largest formations providing shale oil are found in the Permian, Eagle Ford, and Bakken Basins. Shale oil is derived from the similarly-named oil shale, a type of sedimentary rock that traps and retains precursors to oil and gas. 

Key Takeaways

  • Shale oil is a form of unconventional oil that is extracted directly from shale rock formations.
  • Shale oil is made possible thanks to advances in horizontal drilling and fracking.
  • Tight oil differs from shale oil because tight oil can be extracted from not just shale formations but also sandstone and carbonates.
  • Tight oil has become the largest source of domestic oil in the United States.
  • The process of fracking to extract shale oil leads to an immense amount of environmental damage.

Understanding Shale Oil

Shale oil refers to hydrocarbons that are trapped in formations of shale rock that can be extracted for refining.

Shale oil extraction has been made viable thanks to the development of horizontal drilling techniques and hydraulic fracturing (fracking), which allows oil and natural gas producers to efficiently extract resources from shale rock and other low-permeability rock formations.

Permeability refers to the ability of fluids and gases to pass through the rock. Meanwhile, the development of fracking techniques has grown rapidly since the 1950s, with the discovery and exploitation of shale formations in the United States throughout the 1970s and 1980s.

Producing shale oil from shale rock has been traditionally more expensive than conventional crude oil. In addition, the process is sometimes criticized for its destructive impact on the environment.

Nevertheless, U.S. production of shale oil has increased significantly since 2010, driven by technological improvements that have reduced drilling costs and improved drilling efficiency in major shale-producing areas, such as the Bakken, Eagle Ford, and the Permian Basin.

Conventional oil production generally refers to the pipe and pump production off a vertical well. This means a hole has been drilled straight down into a deposit and a pump jack is put on it to help pull the deposit to the surface where it can be sent on for further refining.

The U.S. Energy Information Administration (EIA) estimates that more than 300 billion barrels of shale oil might be technically recoverable, making up approximately 10% of total crude oil resources.

Tight Oil vs. Shale Oil

The oil and natural gas industry often uses the term "tight oil" rather than shale oil when estimating production and resources. This is because tight oil may be extracted from rock formations that, in addition to shale formations, include sandstone and carbonates.

Production from tight oil plays reached 7.31 million barrels per day and totaled nearly 65% of total U.S. oil production in 2020, up from 6.5 million barrels per day and 60% of production in 2018.

Shale oil is also different from "oil shale", which is a type of sedimentary rock that has low permeability and bituminous-like (consisting mainly of hydrocarbons) solids that can be liquefied during the extraction process. That is, oil shale is the sedimentary rock formation containing a type of organic matter called kerogen that yields oil and gas.

Shale in the U.S.

Shale became a strategically significant resource during World War II when the United States searched for a reliable source of energy that could withstand the pressures facing overseas supply chains

In response to this need, the U.S began a program of commercial exploitation of its oil shale reserves during the 1960s. However, the added cost and complexity of extracting oil shale made it less effective as an alternative to conventional oil wells. The shale industry experienced a period of resurgence during the 1970s when the so-called oil crisis briefly made oil shale economically competitive.

However, this trend was reversed during the 1980s as oil prices declined. In more recent years, interest in unconventional oil plays–such as oil shale and shale oil–have continued to ebb and flow depending on the price of crude oil.

The Advantages and Disadvantages of Shale Oil

There are both advantages and disadvantages to extracting shale oil through the process of fracking. The primary advantage of fracking is that it allows countries and oil companies to tap into oil reserves that were previously too difficult to reach via traditional methods.

The process is also more flexible than traditional methods of oil extraction in that once a well is dug and oil extracted, the oil can be stored until oil prices are high enough to turn a profit.

There are a significant amount of cons when it comes to fracking, which has made it a controversial subject. The primary argument against it is the immense environmental damage it has. A significant amount of water has to be pumped into wells before extraction can begin. This either requires using nearby water reserves or trucking in water supplies.

Fracking is also known to negatively impact drinking water caused by leaks into a community's drinking supply or by improper waste disposal. Lastly, fracking causes earthquakes. The high-pressure pumping of water into the ground causes them.

Pros
  • Flexibility in oil extraction

  • Oil can be stored in wells until oil prices rise

Cons
  • Negatively impacts the environment

  • Requires a tremendous amount of water

  • Pollutes drinking water in communities

  • Causes earthquakes

Examples of Shale Oil

The largest shale reserve in the U.S. is the Wolfcamp/Bone Spring shale play in the Permian basin in Western Texas. The production levels in 2019 were 1.2 billion barrels with proven reserves of 11.1 billion barrels. The Permian basin is mined by most of the major oil companies, which include Chevron, Exxon, BP, Shell, and ConocoPhillips.

The second-largest shale play is Baken/Three Forks in the Williston basin, which covers North Dakota, South Dakota, and Montana. In 2019, production levels were 517 million barrels and proven reserves were 5.8 billion barrels.

Chevron is the largest shale oil producer in the U.S.

Shale Oil FAQs

What Is the Difference Between Shale Oil and Oil Shale?

Shale oil is hydrocarbons that are present in the formation of shale rock while oil shale is solid rock that contains kerogen. Kerogen is a petroleum product that is eventually converted into oil by mining and heating. Shale oil is closer to a usable form of oil and requires drilling and fracking to be extracted from the ground.

Can Shale Oil Replace Crude Oil?

Though shale oil has its uses it is not a direct substitute for crude oil in many applications. Shale oil may contain traces of other elements that make it a less refined alternative. Furthermore, the extraction process of shale oil is much more capital intensive, making it more costly than crude oil.

Is Shale Oil Cheaper Than Crude Oil?

Shale oil is not cheaper than crude oil because shale oil is more capital and labor-intensive. Typically, when the price of oil is too low, shale oil production stops because it does not become profitable to extract it. Therefore, shale oil is only extracted when oil prices are higher, making it a more expensive alternative.

Is Shale Oil Used to Make Gasoline?

Yes, shale oil can be used to make gasoline, as well as other oil products, such as diesel fuel and liquid petroleum gas (LPG).

How Long Can U.S. Shale Oil Last?

It is difficult to determine exactly how long U.S. shale oil can last; however, the shale oil reserves in the U.S. have significantly reduced its dependence on oil imports and have actually made the country an oil exporter. As such, how long U.S. shale oil can last will depend on the demand for oil internationally, the demand for oil domestically, as well as how much of the energy supply shifts from oil to renewable energy sources, such as wind and solar.

The Bottom Line

Shale oil refers to hydrocarbons that are trapped in shale rock that require fracking to extract it; a much more capital-intensive process than traditional oil drilling. Shale oil is a new source of oil for the world that only in the last decade or so has taken off, as technology advanced enough to be able to extract it in a cost-effective manner.

The production of shale oil by some countries, such as the U.S., has changed the global oil market, in that it has made the U.S. a net oil exporter rather than an importer and has reduced its need for foreign oil.

Though shale oil has increased the global oil supply, it comes with significant drawbacks, primarily by the immense amount of environmental damage caused by the fracking process.