For this book not to mention David Hughes who has vast amounts of information on shale at shalebubble dot org (including links to mainstream articles in the "In The Media" category), or for that matter, Richard Heinberg, who wrote "Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future" gives me less confidence in what was written.
Here was what was worthwhile:
The biggest reason to doubt the most breathless predictions about America’s future as an oil and gas colossus has more to do with Wall Street than with geopolitics or geology. The fracking of oil, in particular, rests on a financial foundation that is far less secure than most people realize. The most vital ingredient in fracking isn’t chemicals, but capital, with companies relying on Wall Street’s willingness to fund them. If it weren’t for historically low interest rates, it’s not clear there would even have been a fracking boom. “You can make an argument that the Federal Reserve is entirely responsible for the fracking boom,” one private equity titan told me. That view is echoed by Amir Azar, a fellow at Columbia University’s Center on Global Energy Policy. “The real catalyst of the shale revolution was . . . the 2008 financial crisis and the era of unprecedentedly low interest rates it ushered in,” he wrote in a recent report. Another investor puts it this way: “If companies were forced to live within the cash flow they produce, U.S. oil would not be a factor in the rest of the world, and would have grown at a quarter to half the rate that it has.
Fracking companies have been losing money, even when oil was $100 a barrel!
Einhorn’s firm had looked at the financial statements of the sixteen largest publicly traded frackers, which included companies like Pioneer and EOG. Einhorn found that from 2006 to 2014, the fracking firms had spent $80 billion more than they had received from selling oil and gas. Even when oil was at $100 a barrel, none of them generated excess cash flow—in fact, in 2014, when oil was at $100 for part of the year, the group burned through $20 billion. A key reason for the terrible financial results is that fracked oil wells in particular show an incredibly steep decline rate. According to an analysis by the Kansas City Federal Reserve, the average well in the Bakken declines 69 percent in its first year and more than 85 percent in its first three years, while a conventional well might decline by 10 percent a year. One energy analyst calculated that to maintain production of 1 million barrels per day, shale requires up to 2,500 wells, while production in Iraq can do it with fewer than 100. For a fracking operation to show growth requires huge investment each year to offset the decline from the previous years’ wells. To Einhorn, this was clearly a vicious circle.
And who fueled this Ponzi scheme the most? Pension funds, which need to pay retirees because “in a world devoid of growth, shale at least was growing…pension funds were the enablers of the U.S. energy revolution”.
But McLean has no comment or analysis of how hard pensioners will be hit when the fracking boom ends. Will this be as bad as the mortgage crisis?
Charlie Munger, investor and associate of Warren Buffett believes we should conserve what we have instead of drilling frantically, since there is no renewable substitute for transportation and agriculture. “We need to eat as far out as you can see..I think hydrocarbons as chemical feed stock are…irreplaceable. To do well without hydrocarbons requires a new technology that doesn’t exist yet. For now, hycrocarbons are like the topsoil of Iowa. You wouldn’t want to use it as fast as possible, but as slowly as possible”. In Munger’s view, the U.S. was lucky to find shale oil and gas, which America should keep in reserve until it’s clear that we won’t need it. “Imported oil is your friend – every barrel you use up that comes from somebody else is a barrel of your precious oil which you’re going to need to feed your people and maintain your civilization. And you shouldn’t mind paying high prices for foreign oil, you’ll be better off because you delayed gratification, instead of grabbing for it like a child”.
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A very informative overview of the economic boom behind fracking
Reviewed in Canada 🇨🇦 on June 7, 2019
