American Shale Revolution

Boom or Bust?

No one doubts the significance of the American shale revolution’s impact.

The US is projected to become the world’s largest exporter of oil in the next few years. However, even the often overly optimistic IEA is backing off their projections of an average for 2019 of 12.6 million barrels per day to 12.3 million barrels per day. The reason for the mounting skepticism – unprofitability of the shale drilling industry.

The beginning salvo fired in this concern over profitability was in a report last August by the Wall Street Journal finding that the shale industry is once again coming up short. Using data from FactSet, WSJ found that roughly 50 major U.S. oil producers burned through $2 billion more than they generated in the second quarter of last year.

Since then, almost all of the major business publications (notably the WSJ, Forbes, and Bloomberg) have been critical of the lack of profitability of the shale drilling industry.

Investment is beginning to dry up. When investment dries up, fewer wells are drilled. Since these wells have steep decline curves, often getting 70% of the total recoverable oil in the first three years, as drilling slows down oil production will fall faster than the sinking of the Titanic.

More and more mounting evidence suggests that the “shale oil revolution” is more reminiscent of the Ponzi scheme of an Enron than of Colonel Drakes drilling of the first oil well over a century ago. This just might end up being the biggest promoted hype in the history of promoted hype.

What happens as investors quit investing? We may be about to find out. My imagination is that a handful of the best shale drillers like Continental Resources, EOG, WPX Energy, and ExxonMobil will do very well as the house of cards comes falling down on the less profitable companies. U.S production will fall rapidly as the drilling drastically slows down. The traditional, less “flashy”, but more profitable vertical well industry will continue to be the steady underpinning of energy production in America. The price will rise until the next tech-driven oil boom; whatever that will look like. But until then, investors will ride the big wave as it peters out just trying to make sure that they don’t get swallowed up by it when it crashes to shore. Read more about this here.