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May 19, 2019

Shale Oil: Perpetual Priapism Or A Flash In The Pan?

I won't bore you with a discussion of the good things about shale oil production, other than to point out the magnificent case of schadenfreude most of us have watching the world oil markets being turned on their heads, the United States of America becoming the number one oil producer, and the economic dislocation of lower oil prices falling disproportionately on countries that deserve it (Russia, Venezuela, etc.). But the critics need to be noticed, not for any particular insight or wisdom in their analysis, but rather for their conspicuous lack of historical perspective and a startling lack of economic knowledge.

Is the Shale Revolution Here to Stay?

The critics’ argument is threefold. First, they claim that the shale boom depended on huge amounts of debt that was doled out without serious consideration for whether shale producers would be able to pay it back. Second, critics are worried that there’s less shale oil available than originally believed, reflected in shale wells’ depletion rates. Third, they see limited room for growth in the profitability of shale production as shale’s break-even price has stagnated. Combine these factors, the critics say, and you get an industry that will not endure. This Deep Dive will take a closer look at these criticisms and explore whether, in fact, U.S. shale really is an economically sustainable industry.
The first argument is idiotic. Why do the debts of an industry have any bearing on the future viability of that industry. If my shale oil company borrowed money to run the business or grow it or whatever, and it failed, the underlying business is still there, to be liquidated by creditors, presumably by being sold to the next guy who thinks that shale oil is viable. That's sort of how free markets work. There is no guarantee of success, which is why that original money was lent in exchange for interest or a share of the company or both. We need to look no further than the example of the airline industry to refute this ridiculous premise.

The second argument is similarly nonsensical. "Peak Oil" has been refuted so often and for so many years that it has become a punch line.

The third argument is simply odd. A stagnating break-even price for shale oil is a snapshot in time, nothing more. It is not immutable, and judging by the improvements in technology in other parts of the oil industry, one can assume future improvements in shale oil extraction technology. But even if the stagnation were permanent, the well-head price using existing technology has had tremendous effects on oil markets, so there is no reason to assume that growth in profitability is necessary for the continued success of the industry.

Read the article, it is worthwhile and evenhanded. And there is plenty of information that supports an optimistic view of shale oil as an ongoing industry.


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posted by CBD at 12:15 PM

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