The Shale 'Miracle' & The Reality-Optional World Of Bizarro Finance

Authored by James Howard Kunstler via Kunstler.com,

As of this week, the shale oil miracle launched US oil production above the 1970 previous-all-time record at just over ten million barrels a day.

Techno-rapturists are celebrating what seems to be a blindingly bright new golden age of energy greatness.

Independent oil analyst Art Berman, who made the podcast rounds the last two weeks, put it in more reality-accessible terms: “Shale is a retirement party for the oil industry.”

It was an impressive stunt and it had everything to do with the reality-optional world of bizarro finance that emerged from the wreckage of the 2008 Great Financial Crisis. In fact, a look the chart below shows how exactly the rise of shale oil production took off after that milestone year of the long emergency. Around that time, US oil production had sunk below five million barrels a day, and since we were burning through around twenty million barrels a day, the rest had to be imported.

Chart by Steve St. Angelo at www.srsroccoreport.com

In June of 2008, US crude hit $144-a-barrel, a figure so harsh that it crippled economic activity — since just about everything we do depends on oil for making, enabling, and transporting stuff. The price and supply of oil became so problematic after the year 2000 that the US had to desperately engineer a work-around to keep this hyper-complex society operating. The “solution” was debt. If you can’t afford to run your society, then try borrowing from the future to keep your mojo working.

The shale oil industry was a prime beneficiary of this new hyper-debt regime. The orgy of borrowing was primed by Federal Reserve “creation” of trillions of dollars of “capital” out of thin air (QE: Quantitative Easing), along with supernaturally low interest rates on the borrowed money (ZIRP: Zero Interest Rate Policy). The oil companies were desperate in 2008. They were, after all, in the business of producing… oil! (Duh….) — even if a giant company like BP pretended for a while that its initials stood for “Beyond Petroleum.”

The discovery of new oil had been heading down remorselessly for decades, to the point that the world was fatally short of replacing the oil it used every year with new supply. The last significant big fields — Alaska, the North Sea, and Siberia — had been discovered in the 1960s and we knew for sure that the first two were well past their peaks in the early 2000s. By 2005, most of the theoretically producible new oil was in places that were difficult and ultra-expensive to drill in: deep water, for instance, where you need a giant platform costing hundreds of millions of dollars, not to mention armies of highly skilled (highly paid) technicians, plus helicopters to service the rigs. The financial risk (for instance, of drilling a “dry hole”) was matched by the environmental risk of a blowout, which is exactly what happened to BP’s 2010 Deepwater Horizon platform in the Gulf of Mexico, with clean-up costs estimated at $61 billion.

Technology - that El Dorado of the Mind - rode to the rescue with horizontal drilling and fracturing of ”tight” oil-bearing shale rock. It was tight because of low permeability, meaning the oil didn’t flow through it the way it flowed through normal oil-bearing rocks like sandstone. You had to sink a pipe down, angle it horizontally into a strata of shale only a few meters thick, and then blast it apart with water under pressure and particles of sand or ceramic called propants, the job of which was to hold open those fractures so the oil could be sucked out. Well, it worked. The only problem was you couldn’t make any money doing it.

The shale oil companies could get plenty of cash-flow going, but it all went to servicing their bonds or other “innovative” financing schemes, and for many of the companies the cash flow wasn’t even covering those costs. It cost at least six million dollars for each shale well, and it was in the nature of shale oil that the wells depleted so quickly that after Year Three they were pretty much done. But it was something to do, at least, if you were an oil company — an alternative to 1) doing no business at all, or 2) getting into some other line-of-work, like making yoga pants or gluten-free cupcakes.

The two original big shale plays, the Bakken in North Dakota and the Eagle Ford in south Texas, have now apparently peaked and the baton has passed to the Permian Basin in west Texas. If the first two bonanzas were characteristic of shale, we can look forward not very far into the future when the Permian also craps out. There are only so many “sweet spots” in these plays.

The unfortunate part of the story is that the shale oil miracle only made this country more delusional at a moment in history when we really can’t afford to believe in fairy tales.

The financial world is just now entering a long overdue crack-up due to the accumulating unreality induced by Federal Reserve interventions and machinations in markets. As it continues to get unglued — with rising interest rates especially —  we will begin to see the collapse of the bonding and financing arrangements that the fundamentally unprofitable shale “miracle” has been based on.

And then you will see the end of the shale “miracle.” It is likely to happen very quickly. It was fun while it lasted. Now comes the hard part: getting through this without the nation completely losing its marbles and doing something stupid and desperate — like starting another merry little war.

Comments

MK ULTRA Alpha Griffin Sat, 02/10/2018 - 18:12 Permalink

The US has the largest oil shale deposits in the world. There are huge oil shale deposits which are in the early phase of exploration.

The US oil shale reserves has over 2 trillion barrels of recoverable hydrocarbons.

Official but inaccurate traditional crude oil reserves is over 100 billion barrels, however the latest 3D survey on Alaska's North Slope coupled with the recent 3 billion barrel find, means there is a hell of a lot more oil than this defeatist rant programmed during the Obama communist defeatism era.

US reserves of crude oil are increasing and that's not oil shale.

Go look it up because the author sure didn't. This is typical of the political slanted poorly researched article these BS artist try to pass for real journalism.

Fact, major oil companies have announced a massive long term investment in shale. There are thousands of incompleted wells, drilled and ready to be completed, but from the above article people get a distorted view of the US crude oil production.

In reply to by Griffin

RAT005 MK ULTRA Alpha Sat, 02/10/2018 - 18:32 Permalink

Plus there is hundreds of years of coal that doesn't create global warming that is driven by solar activity.  If the coal were used properly for base power and the nat gas used almost exclusively for peaker power, then the nat gas would last hundreds of years.  nat gas cars were almost happening before the elec. joke started.  The batteries (with free elec.) cost about the same as gasoline per mile and nat. gas costs a lot less than gasoline.

In reply to by MK ULTRA Alpha

UnpatrioticHoarder RAT005 Sat, 02/10/2018 - 18:42 Permalink

Most likely the US govt has issued National Security directives to shale oil producers so they can report imaginary oil production and receive imaginary revenue thanks to undisclosed Fed loans. Wouldn't it look terrible for the US if their imaginary economic growth numbers were fatally undermined by collapsing oil consumption figures? Now the US is "energy independent" i.e. it has pretty much been in a Depression for a decade.

In reply to by RAT005

D503 Juggernaut x2 Sun, 02/11/2018 - 08:44 Permalink

Yeah, except ask anyone who owns a lng or propane vehicle, or someone who works on them, and you'll understand why we don't use it. Numbers as low as 4 mp"g" are the classic and the maintenance required is more frequent and expensive. 

When you refuse to acknowledge all of the variables involved, and call apples oranges, you end up with pics poor conflations. You can't beat physics just by offsetting the one metric you decide to measure by leaving other variables effected as externalities. 

In reply to by Juggernaut x2

MK ULTRA Alpha RAT005 Sat, 02/10/2018 - 18:54 Permalink

I forgot to point out, one of the most important products from shale is natural gas. The natural gas reserves are growing and more and more are using natural gas.

US natural gas is being sold abroad and the US doesn't have the pipeline grid to handle the demand for natural gas. People are freezing in America because increased usage of fuels during winter caused shortages. There would be no shortages with natural gas pipelines.

The US has the largest deposits of oil shale in the world.

In reply to by RAT005

MK ULTRA Alpha phaedrus1952 Sat, 02/10/2018 - 20:00 Permalink

There are cities in the north freezing to death because the state of New York blocks the transport of shale natural gas. There are bottlenecks nationwide and when there is a major winter event, stockpiles run low and they freeze. Obama hold overs blocked Energy Secretary Perry's plan to allow power plants the right to store a backup supply of the natural resource the power plant must have for sustained operation in bad weather. Unfortunately, the energy resupply of critical infrastructure and people in a weather disaster has led to millions suffering from freezing weather. 

There are many common sense solutions for many issues, we need to analyze the cost and need, political and economic, for the Strategic Petroleum Reserve. It's less than a billion barrels of low quality thick sour crude oil in four salt domes. We pay to keep a standing army of workers to maintain this obsolete counter to OPEC. (Bush II pushed to keep filling it with low quality $150 barrels of oil.)

If this nation can build a national hydrocarbon pipeline grid, then the amount of storage capacity in the pipelines would be more than stored in the salt domes. Crude, refined product, natural gas, methane, etc.

The only limit to US production is supplying demand, because of a poor distribution pipeline system certain imported petroleum products can compete because there is no alternative because the hydrocarbon can't be supplied with the present pipeline grid. This is the political and economic bottleneck slowing US hydrocarbon production.

In reply to by phaedrus1952

phaedrus1952 MK ULTRA Alpha Sat, 02/10/2018 - 23:56 Permalink

The recent turning aside of the Northern Pass transmission line by New Hampshire regulators is going to prompt severe consequences for the Massachusetts residents and businesses in the coming winters.

Next winter is the final one for the 700 Mw nuclear Pilgrim plant.

They are simply out of time up there to generate sufficient electricity during several coming years' cold snaps unless they have huge amounts of heating oil on near standby to supply dual fuel plants.

Already environmentalists are pushing preposterous offshore wind schemes with absolutely zero awareness of the shortfalls of these boondoggle.

The 2 gas pipes, New England Direct and Access Northeast could have provided many decades worth of cheap heating/power generating fuel.

Oh well ...

In reply to by MK ULTRA Alpha

Moving and Grooving MK ULTRA Alpha Sun, 02/11/2018 - 11:37 Permalink

Ok, so we'll put the pipeline, oh, say 50' from your front porch. Hey, national security and stuff.

 

Edit. I thought this sounded snarky. Ok, it is, but I missed my point - there are a _lot_ of pipeline right-of-ways, and fiber too, all over the place. There are now right of way owners leasing to pipeline companies, with competing pipes running next to each other in places. This needs to be thought out and planned starting at the national / continental level, down to local. A new national distribution scheme can coexist nicely with what's already in place, I believe. Work to be done here, and the industry folks need to be at the table.

 

.

In reply to by MK ULTRA Alpha

Jack Oliver MK ULTRA Alpha Sun, 02/11/2018 - 04:14 Permalink

So they say - but they ‘say’ a FUCKING lot of things ! 

Zio/US has missed the FUCKING boat ! 

For over 20 years - Russsia has been building a vast NG pipeline ‘ network’ !! 

Iran only agreed to stop its uranium enrichment program ( which likely didn’t exist anyway ) so they could sell their vast reserves of oil on the world market - at ANY price !! 

Iran knows oil makes them a target - they have already developed FREE plasma energy !! 

Iran - Russia etc are fearlessly creating a FUCKING ‘new’ world  - one that the Zio/US won’t be part of !! 

 

In reply to by MK ULTRA Alpha

Prosource MK ULTRA Alpha Sun, 02/11/2018 - 14:32 Permalink

Unfortunately, natural gas pipelines are inherently fraudulent. I was a whistleblower that discovered billions of dollars of overcharges and fraud by Chevron Pipeline, which led to the nearly immediate 'early retirement' or Chevron's CEO and CFO in 2008 and 2009. Did Chevron change their fraudulent accounting - including off balance sheet losses, failure to identify material weaknesses in their accounting system, underpayment of 100s of millions in royalties, and knowing and willful false statements by subsequent CEOs and CFOs on Chevron's SEC 10K and 10Q filings? NO. They actually changed the SEC required language on those SEC filings, saying all fraud has been disclosed "if it was material" - which of course becomes a legal/accounting argument; when you have billions of dollars of revenue per year, is hundreds of millions of dollars of ONGOING FRAUD - really material? Enron arguments, covering up the crime of the century - fraudulently milking oil and gas actually OWNED by the people of the US, and which could solve many domestic national debt, healthcare, employment, education, and other significant issues. Chevron's defense counsel? Bracewell and Giuliani. Interesting look behind the scenes of the zio-organized crime owned and operated world of big oil and their PIPELINES, which, incidentally, are significant driving forces of middle east wars for the past half century, as most ZH readers know. Tyrannical MIC = same people/powers as big oil. All evidence and roads lead to .....

In reply to by MK ULTRA Alpha

swmnguy garypaul Sun, 02/11/2018 - 07:56 Permalink

Everybody likes to conflate "Laws" of economics with Laws (note the lack of quote marks) of Nature.

Economics is not natural.  It's one context of human psychology.  Nothing more, nothing less.

So to define the Energy industry in terms of economics and finance only makes sense in terms of human psychology and current customs.

The real currency of modern society is Joules.  Energy.  Money is fungible, they say, meaning that since it's a human abstraction we can make whatever we want to be money into money, and we can make that money be worth whatever we decide.

Not so with Joules.  

It's an indictment of our screwed-up system of Finance that we can't do things we absolutely have to do because we can't afford it financially.  That means our system of evaluating cost and benefits has malfunctioned and is giving false readings and false incentives.

However, that doesn't make any difference once it costs 1 Joule of energy to extract 1 Joule of energy.  Once that happens, none of our shared hallucination of Finance makes any difference.  Fracking is very energy-intensive, if you look at all the inputs.  Petroleum production everywhere has a collapsing EROEI (Energy Returned On Energy Invested).  That's the real issue. 

At some point we'll pull our heads out of our asses, force our Oligarchs to be inconvenienced and give up some of their accumulated advantages and fix our system of Finance.  But that won't change the fact that we're getting closer to the point when on balance we expend more energy than we get from extraction.  

In reply to by garypaul

Government nee… Juggernaut x2 Sat, 02/10/2018 - 19:01 Permalink

Shale oil and gas are economically viable, and the drilling and production efficiencies continue to be enhanced.  What initially started as a $80-90/bbl breakeven is close to $50 now.  I become giddy at the thought of the American jobs created, not just getting this out of the ground, but at the renaissance in the petrochemical industry.  As US production climbs, the reliance on the Middle East for oil declines and there is less of a justification for all that tyrannical MIC involvement.  We need jobs and industry.  Shale oil gives us a wonderful opportunity.  Good times!

In reply to by Juggernaut x2

D503 Government nee… Sun, 02/11/2018 - 09:03 Permalink

I could substitute "solar" everywhere you've claimed "shale oil and gas" and you'd scream i was lying, and I would be lying.  

The dollar value is based not on actual cost but on the shifting standard of the dollar, and many of the hidden costs offset like aquifer depletion, infrastructure costs subsidized by local, state, and federal taxes, as well as the first drillers that went bust on their leases for the second companies to sweep in and turn a profit on the loss either by benefiting from where not to drill, or the fire sale of the equipment in place. 

It's a simple fact that only a miniscule fraction of people (~1%) even have the STEM education necessary to begin to consider how all of this works, that many of them aren't focused on the issue, and that most who are focused on it have the financial obligation for it to succeed. 

There is simply no way everyone in this comment section is an engineer or other equally educated professional, yet so many here are explaining how this works. It's mind blowing. If this was legal advise,  or a discussion on surgery,  you'd be telling lawyers and doctors how they knew nothing, but when shtf who do you go running to? 

 

In reply to by Government nee…

rwe2late Government nee… Sun, 02/11/2018 - 11:40 Permalink

 don't get too  exuberant about the prospect of ending Mideast MIC involvement.

The purpose was never primarily about securing an oil supply for the USA.

The actual purpose was always to control the access to resources by OTHERS , and thereby to govern over their finances, markets, and production.

Capitalist development always aims to develop monopolies, privatize, and RESTRICT access by consumers and competitors to resources, markets, and production in order to maximize profit.

In reply to by Government nee…

MK ULTRA Alpha garypaul Sat, 02/10/2018 - 19:04 Permalink

Thank you for your comment.

The US is producing over 10 million barrels per day. Around 2007, the US was importing 12.5 million barrels per day of OPEC crude oil, today, the US imports 2.5 million barrels from OPEC.

OPEC has lost market share in the US, we're in a battle for global market share. This isn't a speculator market it's for the first time in a long time, a supply and demand market.

I'm predicting 12 million to 14 million barrels per day production over the next three years. At 14 million barrels per day, the US economic growth rate will increase dramatically.  

In reply to by garypaul

SixIsNinE phaedrus1952 Sat, 02/10/2018 - 21:54 Permalink

ASPO-USA close down a few weeks ago. (association for study of peak oil)

what kuntsler forgets, intentionally i bet - is that we intentionally shifted to dirt cheap foreign oil sources back then because it is the logical thing to do.  whilst opening up all kind of foreign business opportunities why not save domestic oil for later.  and of course it's also logical to keep people guessing on such a critical commodity supply.

 

In reply to by phaedrus1952

ozzz169 MK ULTRA Alpha Sat, 02/10/2018 - 19:16 Permalink

You are right, there is way more oil than these alarmists like to claim, and they are getting better at getting it out and cost per barrel has gone down a lot.  I have worked in every area he has mentioned.  The technology is great and only getting better.  I have worked on billion dollar projects they are amazing to see the amount of logistics and tech that goes into it.  if there is a will there is a way, and they will recover it.  the fact is these scare mongers want to artificially raise prices.  the whole "fossile fuel" name comes from propaganda to make it seem artificially scares.  we are going to run out any day, that last barrel is just around the corner

 

In reply to by MK ULTRA Alpha

MK ULTRA Alpha ozzz169 Sat, 02/10/2018 - 19:28 Permalink

They even use a sensor on the drill bit to track oil. Kind of like a blood hound drill bit. That's the latest innovation.

The world is going to be a different world when the US is producing at 14 million barrel per day. It's an economic revolution of the first order.

Naysayers radicalized from 8 years of Obama communist defeatism apology indoctrination must wake up to the new US economic revival.

Good Luck.

In reply to by ozzz169

MK ULTRA Alpha philipat Sat, 02/10/2018 - 19:33 Permalink

That's false, big false, where have you been? The day of Trumps SOTU speech Exxon announced a massive long term commitment to shale. And there have been many major oil companies prominent in many oil industry articles explaining how big oil was biding up domestic oil equipment, land and resources.

These are announced corporate developments you're saying didn't happen.

You're purposely lying to promoted your failed communist agenda, you're LOSING and WE ARE WINNING.

AMERICA FIRST.

In reply to by philipat

dchang0 MK ULTRA Alpha Sat, 02/10/2018 - 20:17 Permalink

Announcing a commitment is meaningless.

Everybody knows at least one person that announced a commitment of marriage to their new bride or husband on their wedding day and that then fell through on the commitment later.

Politicians and business leaders announce commitments to various big programs all the time, like the bullet train in California or the 710 freeway that was supposed to cut through South Pasadena.

What matters is actual oil pulled out of the ground and brought to market, and we won't be able to celebrate a long-term prediction of that until it is actually done at the predicted date in the future.

In reply to by MK ULTRA Alpha

bshirley1968 Casey Stengel Sat, 02/10/2018 - 22:07 Permalink

You're full of shit. NOT ONE SHALE OIL COMPANY HAS POSTED ONE PENNY OF PROFIT FROM SHALE OPERATIONS IN 12 YEARS!

NOT ONE! Look it up. The entire industry is living on debt. ExxonMobil, Shell, BP, ConocoPhillips, etc. have doubled, tripled, and quadrupled their debt levels one the last twelve years. $52 won't service their debt.

Another point you are missing, the public can't afford higher energy prices. So the industry is stuck. 14 million barrels a day? LMAO! We can't even use what they are pumping now. Demand is down so that we are stacking the shit at these levels.

Still we are using 19 million barrels day.....every damn day! Completely unsustainable. Why? Cost! We are reaching a one for one cost per barrel pumped. When we get closer than 3:1 it is pretty much over.....for the average consumer. Statoil CEO just got through stating that 70% of the current known oil/gas will never see the light of day.....it will cost too much to get it out.

You boys need to get out more and expand you base of knowledge past the pump and dumpers on CNBC.

In reply to by Casey Stengel

new game MK ULTRA Alpha Sat, 02/10/2018 - 19:39 Permalink

my son has been doing this for 6 years now. i know the company h k has hired everybody back from the 40 dollar plunge era.

now they face the problem of not enough skilled rough necks that impair safety as they learn on the job. he is in charge of keeping the rig serviced and repairs, currently in Ohio, eastern side near Penn. they are drilling 25000 ft holes for natty from muti hole platforms.

2 weeks on-12 hour days with 4 hr ot/day. 2 weeks off with flights paid. think about that. 26 weeks off, with 26 week of all work, some sleep and back to it. like he said, making bank b/4 the bust. 80+k/year...

not bad gig if one is not afraid of very dangerous real hard work. he has explained many times some of the technology deployed and I will say:crazy shit maynard. technology even many here would be amazed that it is being done. this industry has evolved into a technology hotbed of engineering wizards conquering once insurmountable geology formations. imagine what can be done in the alternative space when these minds shift over at 150/barrel and the gov.org subsidy suck offs are put to bed by free market enteprise for profit with real innovation. howard take note, cause you are selling a book that can't happen unless you hope and pray half the world population dies off...howard is liberal progressive hooked on a gov.org mentality that the gov needs to step in to control every basket made from hand. maybe he would be ok with a subsidy from hillary's foundation for basket weavers...

 

In reply to by MK ULTRA Alpha