Shale, End of a Revolution?
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Joe Costello
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The FT had a piece over the weekend, “Oil chiefs warn of end to US shale boom” which would be quite an incredible development. The US shale boom has been the single greatest event impacting global affairs in the last two decades, humanity’s last great industrial effort. Everyone who followed oil knew the oil was there, but in 2005, absolutely no one, and I mean no one, claimed they could ramp production up to 9 million barrels a day in a decade. That’s well over a hundred-thousand wells drilled and fracked. Nothing less than incredible.
You might remember what started the boom was oil reaching a $100 a barrel in the fall of 2007 and briefly touching $150 in the summer of 2008, but then the First Derivative Bubble popped. It’s never been clear if shale was profitable. Certainly it was for the folks providing the drilling materials, but the owners not quite so clear. Unlike the previous century and half of the oil industry, which literally printed money, shale was entirely debt dependent. A few years ago, Deloitte, who claim to know such things, said shale had created $300 billion in bad debt, though there’s never been much detail on who lost the money.
The FT writes,
“US oil companies are cutting spending and idling drilling rigs, as Donald Trump’s tariffs push up costs and falling crude prices squeeze profits, prompting executives to warn that a decade-long shale boom is ending."
"A fall in production would end a stunning run in US energy, where the shale revolution delivered ever greater volumes of cheap oil and gas to power the economy, a boost to GDP and labour markets, and an export surge that improved the country’s trade balance.
"Trump has promised to “unleash” more drilling and production in a bid to secure US “energy dominance”. But production, which hit a record high under his predecessor Joe Biden, could fall still further if prices keep sinking."
I always found this one of the most amusing claims by the president. The ability of shale production to grow has slowed appreciably in the last half-dozen years. At some point, no matter what the price, production will start decreasing at a similar rate to how fast it went up. This gets to the nut of what is the cost, leaving aside the environmental impacts as those have never been accounted.
The cost of shale, which varies somewhat by area, has never been quite clear. One always had to take the industry’s claims with a grain of salt. They piled debt as fast they plumbed oil. Back in January, the Dallas Fed officially quoted the industry saying they needed $65 a barrel to drill new wells. So, that might be about right. The price has drifted below $65 over the last months and talk of shutting down production has grown.
If the shale revolution is over, even if instigated artificially, that would be something. I looked up the global production numbers at the Energy Information Agency (EIA). In 2008, the start of the shale boom, global oil production of call it good old fashion crude, "oil and condensate," was 74.4 million barrels a day (mbd), today it’s at 81.7. That’s a difference of 7 mbd. Shale added 9 mbd more or less in that time. So, if there had been no shale revolution, today the world would have to be producing another 11 mbd somewhere else to make up the difference.
Now, if you go around the world and add up where that 11 mbd could be made up, say the Sauds add two, the Russians one or two, stop the devolution of Libya as a country etc, you could get 7 or 8 mbd, which would leave you short 3 mbd or so short. Unlike debt, no one can print that.
So, salute the shale revolution, whether you thought it was good or bad, I think it no good at all, but it's passing will mean a very different world.
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Joe Costello
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