Shale Boom, Shale Bust: The Myth of Saudi America
One of the most respected traders in the oil sector – Dan Dicker. Dan has recently released his second book Shale Boom, Shale Bust: The Myth of Saudi America”, and I thought readers would find the below excerpt of interest. The book is now available for preorder on Amazon.
"...I knew that the conventional wisdom on the drop in oil prices after the OPEC meeting in November, 2014 was going to be ascribed solely to the Saudis, a conclusion that was far too simple to explain the massive collapse. No, something else, something even more important was going on -
The Saudi reticence to cut production was just a catalyst. The bigger theme was an already overdue bust that was happening in U.S. shale oil.
This oil bonanza had been built on a house of cards, ready at any moment to topple over. The list of fragile flaws in the system was long. Each state had its own set of regulations and oversights on leases and operations, with no consistent framework for oil shale fracking. Despite (or because of) the complete freedom in oversight, fracking for oil from shale had grown at a frightening and undisciplined pace. As prices declined, it became clear that much of this breakneck activity had been financed by very risky and highly leveraged capital investments that mirrored some of the worst pyramiding schemes I had ever seen. But because prices had been high, many of the shortcomings had been conveniently overlooked: oil was being taken out of the ground as quickly as it could be drilled.
The months following the OPEC announcement showed me just how rickety the entire structure for retrieving shale oil had become. Oil companies that had been the darlings of Wall Street not one year earlier were now losing 70-80% of their share value, as their corporate bonds, which were already poorly rated, risked complete default. Virtually every company involved in shale production was forced to slash development budgets, hoping to ride out what they prayed was a temporary dip in the price of oil. Yet projected production numbers from all of these players continued to rise, almost insuring that prices would stay cheap. What had been a universally optimistic industry not 6 months prior had changed overnight into a frightened group playing a collective game of chicken, as oil producers hunkered down with reduced budgets and hoped like mad that the “other guy” would go broke first.
That shale oil had folded like a cheap suitcase so quickly and completely was incredible to witness and, I thought, incredibly important: it was undeniable proof that as a nation, we had completely bolloxed this once-in-a-lifetime opportunity.
To me, this was more than a story of another boom/bust cycle in the oil patch. God knows that the oil business had seen enough of those already and knew what they were about. But I saw shale oil not as just another in a long line of boom/bust cycles in U.S. oil production, but as the last boom we were likely to have. I didn't see shale oil as just another technological advance in a long line of advances yet to come; I saw it as the last best chance to put the U.S. on a firm footing towards a cogent national energy policy and as a conduit towards a real and necessary renewable energy future. And we were blowing it.
But I didn't see these mistakes as irreversible. Instead, I saw the bust in shale oil as a chance to get it right. I truly believe that shale can deliver on many, if not all, of the promises it has already pledged.
Simple economic laws would say that this period of low prices can't really last very long, no matter what I believe the industry needs. As costs for exploration continue to rise, so does the global appetite for oil—two simple facts that ensure that prices must substantially rise again.
But my hope is that in this brief window of low prices, we might find some clarity. The “bust” cycle in shale since late 2014 spotlights the deficits in how we're managing shale oil in a way that the “boom” cycle between 2010 and 2014 as oil averaged above $90 a barrel cannot: with oil prices high, focus centers on quick growth, quick profits, and soaring share prices. But with oil prices low and energy companies reeling, there is a brief window for reflection—to try and understand what is happening and why it is happening and to chart a more responsible and less purely opportunistic way to a smarter, more sustainable energy future.
My 30-year perspective as a trader, analyst, and columnist gives, I think, a unique view into these questions—totally without ulterior motive for financial gain, yet with an inside understanding of the oil business and the financial markets that guide that industry. I hope to help you understand shale oil's boom and current bust and why the hopes and hypes of shale need to be re-imagined and restructured…before oil prices recover and the markets again give a green light to energy companies to resume their natural instinct—of pissing it all away."
