By F. William Engdahl
Over the course of the past decade the United States, following decades of relative stagnation in oil production, has surprised many to become the largest oil producer in the world, exceeding Russia as well as Saudi Arabia.
Latest daily production is just above 12.1 million barrels a day. In November 2018 for the first time in decades the US became a net oil exporter.
The geopolitical implications to this energy boom in a world where oil determines the growth of entire economies, would appear to be great. Almost all the increase owes to the exploitation of what is called shale oil, unconventional oil found in shale rock formations. The US Department of Energy projects a rise to 8.8 million barrels daily from US shale oil alone, a new record. Now though, we are seeing the first clear signs that the “shale boom” could implode even faster than it rose. The implications for American foreign policy and global geopolitics and economics are significant.
The ‘Fracking’ Revolution
The idea of extracting oil or natural gas embedded in shale rocks has been known for years. However shale oil, or tight oil as it is known, first became economical with introduction of new horizontal drilling techniques combined with oil prices of $100 a barrel or more. This was about two decades ago.
In hydraulic fracturing or fracking, oil embedded in shale rock thousands of feet down is injected with a high pressure mix of water, lots of it, mixed with chemicals and sand. The de facto sand blasting creates fissures where oil can flow into the oil pipeline. The actual drilling of a shale well is only about 30-40% of the total cost. Up to 55-70% are from completion which includes actual fracking. The independent oil consultancy, Wood Mackenzie, recently estimated that the USA held an impressive 60% of all world shale reserves that are economically viable at oil prices of $60 per barrel or less.
Now it begins to get interesting. The current price for the West Texas Intermediate marker grade of oil is around $58 a barrel, where it has been for months. The price has not shot up as many expected despite the disruptions in Venezuela, in Iran and around the Persian Gulf. This puts shale well production, much of which today is in the Permian basin in West Texas or Bakken in North Dakota, at a delicate point.
When Saudi Arabia and the Arab OPEC producers decided to flood the market in 2014 with cheap oil in order to force the US shale producers into bankruptcy, the results were disastrous for the OPEC countries financially, but new technology advances allowed the major part of US shale oil production to survive at far lower prices. That, combined with a Federal Reserve Zero Interest Rate Policy (ZIRP), made borrowing to produce oil attractive for shale companies. Now, with two years of gradual Fed rate increase policies, shale companies are beginning to show signs of major stress.
Little known is the fact that despite all technological advances and economies of scale, the USA shale oil industry as a whole has yet to turn a net profit. At a juncture when world GDP growth begins to look very bleak, whether in China or in the EU or Emerging Markets like Brazil or Argentina or Turkey, US shale companies face a critical juncture.
The year 2018, according to projections of the International Energy Agency was supposed to be the year that the shale industry finally turned a profit. The IEA wrote in early 2018 that “higher prices and operational improvements are putting the US shale sector on track to achieve positive free cash flow in 2018 for the first time ever.” Since it began, until the Saudi price crash, that is from 2000-2014, US shale companies as a whole according to IEA estimates, already generated a cumulative negative free cash flow of more than $200 billion. With glowing predictions for a “new Saudi Arabia, and banks willing to lend to after the 2008 financial crisis, money poured into shale. Companies claimed once infrastructure was in place the profits would soon flow. It didn’t. Despite over two years of rising world oil prices, some 33 US publicly traded shale companies had a combined negative cash flow of $3.9 billion in the first half of 2018.
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