Sunday, July 18, 2021

Has OPEC finally won the war against shale oil?

I have maintained for the past six years that a key goal of OPEC has been to so demoralize investors in shale oil that they stop sending money to the companies that drill for it. As I've written previously, I believe that OPEC's contest with the shale oil industry is "part of a broader strategy meant to maximize Saudi revenues as production in the kingdom hovers at an all-time high over the next decade before beginning a decline." It now appears that OPEC may have finally won its war against shale.

Investment in shale oil companies has finally collapsed—even as oil prices levitate. It has been a long time coming. The industry would like you to believe that it is now showing "restraint" in its capital spending. But, to use a dieting analogy, there is a big difference between watching what you eat and having your jaw wired shut—involuntarily in this case. The industry has experienced the equivalent of the latter in the capital markets.

What has amazed all of us who watched this battle play out is that OPEC didn't win sooner. The relentless tolerance for losses among investors was beyond belief. And, when those investors returned in force after a brief vacation during the oil price bust in 2015, we skeptics grew concerned that rational thought had been eliminated from the universe.

Why did we think that? Because by that time the industry had already burned through hundreds of billions of investors' dollars, dollars that merely subsidized petroleum consumers while enriching industry insiders. I am reminded of the joke about the business owner who explained that while he loses 5 cents on every sale, he makes it up in volume. Free cash flow numbers for the industry as a whole made it absolutely obvious that shale oil had been a money-loser for years. Why couldn't investors see something that obvious?

The answer, of course, is that industry executives kept telling investors that the fields their companies were exploiting rivalled those of Saudi Arabia. (It's always good to say Saudi Arabia as many times as possible in presentations to oil investors.) I am reminded of another joke about a woman who complained to her therapist that even though she had been married for three years, she and her husband had not consummated their marriage. The stunned therapist asked how that could be so. Her patient explained that her husband is a Microsoft executive. Every evening all he does is sit on the end of the bed and tell her how great it's going to be.

That is approximately what shale oil executives were doing to investors. Executives told those investors that they were getting in early on hugely valuable asset plays. Resource companies that don't make money often fall back on this narrative. But here's what that really means as related to me by a drilling foreman. It means the company is putting a drill to marginal deposits in order to claim them as reserves—even when there is no realistic prospect the company will ever make any money producing those reserves.

One estimate puts shale oil and gas industry losses at around $500 billion in the last five years. But the industry was losing money as a whole before that even when oil was above $100 per barrel early in the last decade. The problem is that shale oil is difficult and costly to extract and the technologies that enabled that extraction were never efficient enough to create widespread profitability.

The problem from here forward is that most of the sweet spots in U.S. shale plays have been exploited. As the industry runs out of them and increasingly moves toward developing more difficult shale deposits, costs will rise—thus making it even more difficult to turn a profit on shale oil.

There is an oil price that would certainly make shale deposits profitable. But that price is likely too high for the economy and consumers to bear without falling into a recession. That, it turns out, is the conundrum for the oil industry as a whole. The price band that is affordable to consumers in the long run no longer overlaps with the price band that will allow oil companies to exploit increasingly difficult-to-extract deposits.

That may already be reflected in the fact that oil production worldwide peaked in November 2018, long before the pandemic began. Those of us who have been concerned about a near-term peak in world production are starting to believe that we've already passed it. It may turn out that all the hype over shale oil had people looking the wrong way when one of the most momentous developments in modern history was taking place in plain view.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique,, OilVoice, TalkMarkets,, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He can be contacted at


Joe Clarkson said...

Great summary of the folly of shale!

I am curious about one thing though: Since the energy available from oil is so much cheaper than the energy available from human and animal muscle, why shouldn't the modern economy be able to support very much higher oil prices? Why is it that the EROI from energy sources must exceed a certain threshold to support a modern economy and how do we really know what that threshold is? I would also think that there is so much energy waste in the US economy that efficiency gains could allow it to support oil prices many multiples of current prices.

Kurt Cobb said...


You bring up important points. EROI is critical. As EROI plummets for oil as it becomes more and more difficult to extract, we must consider two things: 1) where the energy invested to get it is coming from and 2) the portion of economic activity which must be devoted to extracting it. It turns out that much of the energy to drill a well comes from oil itself for all the machines which are required (or tankers of fracking water or other vehicles). And, of course, there is the energy cost of the equipment. And, there is the number of wells which must be drilled and the rate at which they must be drilled. That gets us to point 2 which is how much of the economy must be devoted to getting oil.

When other liquid (or gaseous) fuels are cheaper to produce, they will be preferred. But what if they, too, are expensive or depleting and declining just like oil? Of course, it's obvious that oil cannot be considered in isolation and the total environment in which we are extracting oil cannot be known for certain in the future.

When you have a complex society such as ours that has so many interlocking loops of dependency--for example, the oil industry could not function without a robust steel and fabrication industry which depends on mining operations which depend on diesel--when that is the case, problems in supply chains ripple through the economy as we have seen happen with COVID. You can see these loops everywhere. The electricity used to power the factories that make the pipes for the oil industry requires coal or possibly natural gas which require petroleum to power the machines that extract them as so on and so on. I've heard these loops referred to as depth of fabrication.

There is a certain level of energy surplus required to keep these loops intact. I don't think we know what it is. But we risk finding out abruptly if we have a precipitous drop in energy availability. High complexity requires more energy to keep it intact than low complexity. In brief, high complexity implies a lot of people doing things other than gathering energy for society.

Certainly, we could simply let things crash into a lower state of complexity that would use less energy and people could shift their efforts to do other things such as grow food. But that's what we call a crisis and a collapse. Not pleasant, but on our current trajectory seemingly inevitable.

I agree that we could be vastly more efficient with our energy use. The waste is partly built into the system--electric generating plants sited too far away from cities to make use of their waste heat for district heating, for example--and also partly our habits: using lots of air-conditioning in summer. Assuming we make efficiency gains quickly, we will still be faced with Jevons Paradox. Much of the resulting surplus fuel would be used to expand economic activity increasing overall use in the end. Only a hard cap on energy use would prevent this from happening.

Radu Diaconu said...

This year climate change is accelarating to a level that it is becoming destructuve. Massive floods in Germany and China, massive forest fires, heat waves of an unprecedent vilence and duration and so on.
People are getting more and more hooked on renewables, electric cars, going green...but I pose myself a very serious question: since weather patterns are becoming so unpredictable and all weather phenomenons are getting ever more violent, how we will produce "green energy" in a predictable and stable way?
In my opinion, the transition to a zero emission all renewables energy society is no longer possible and the unstability of global weather will destabilize all the loops you talk more and more up to a breaking point.

Anonymous said...

I've been reading the anti shale stories since 2008 in peak oil articles. And they've consistently been too pessimistic. In many cases, even the cornucopians were not optimistic enough.

How many peakers predicted the massive growth in US production? Yes, shale is not 20 feet tall. Yes, it has limits, issues. But it's done a ton of things that you, Berman, Hughes, etc. said it wouldn't. And that goes double for shale gas.

Kurt Cobb said...

Anonymous is right that we skeptics have been too pessimistic about production of both shale oil and natural gas in the United States. What has astonished and confounded us is the amount of capital investors were willing to lose and lose repeatedly on their investments in what are clearly uneconomic deposits.

Between 2008 and 2019, the shale industry consumed 80 percent of its investors' capital. As economist Herbert Stein once said, "If something cannot go on forever, it will stop." A society cannot continually and forever subsidize uneconomic energy sources. Apparently, investors have finally largely given up. That doesn't mean all production from shale wells will cease. It must means that only those wells which create positive cash flow will continue since there will be too little new investment money to make up the huge negative cash flows of the past.