The Oil Price Collapse Is Because of Expensive Tight Oil

The present oil price collapse is because of over-production of expensive tight oil. The collapse occurred because of the inability of the world market to support the cost of the new expensive oil supply from shale, oil sands and deep water. Demand was progressively destroyed during the longest period of sustained high oil prices in history from 2010 through 2014. 

Since the early 2000s, the price of oil was largely insensitive to the fundamentals of supply and demand as long as prices were less than about $90 per barrel. The chart below shows world liquids supply minus demand (relative supply surplus or deficit), and WTI oil price.

Chart_Prod-Cons 2003-2015_WTI CPI Price 3 April 2015
Figure 1. World liquids relative surplus or deficit (production minus consumption) and WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars, 2003-2015.  Source:  EIA, U.S. Bureau of Labor Statistics, and Labyrinth Consulting Services, Inc.
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In mid-2004 and mid-2005, the relative supply surplus was much greater than it has been during the 2014-2015 price collapse yet prices continued to rise. When oil traders perceive supply limits and rising prices, price below some critical threshold is not an issue. They are willing to carry the cost of storage and interest to hold the commodity in the future when it will be more valuable.

In 2004, the relative supply surplus reached 1.9 million barrels per day and in 2005, it reached 4.1 million barrels per day.  By contrast, the greatest supply surplus in the current oil price collapse was 1.7 million barrels per day in January 2015. 

During periods of supply surplus in 2004 and 2005, prices were less than $75 per barrel. The average WTI oil price between November 2010 and October 2014 was $91 and for 18 months of that period, prices were more than $100 per barrel.

Oil prices have collapsed three times because of demand destruction:  in 1979, 2008 and 2014. In all of these cases, oil prices exceeded $90 per barrel in real 2015 dollars for extended periods.  The chart below shows WTI oil price* from 1970 to the present with periods when price exceeded $90 per barrel highlighted in red.

CPI WTI GT $90 26 March 2015
Figure 2. WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars. Areas in red represent periods when oil prices exceeded $90 per barrel.  Source:  U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.
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Oil prices were more than $90 in 1979-1981 for 26 months; in 2008-2009, for 13 months; and in 2010-2014, for 33 months. 2010-2014 was the longest period of oil prices above $90 in history. There were other factors at work in all three of these high oil-price episodes and their subsequent periods of price collapse.

In 1979, the trigger for oil-price increase was the Iranian Revolution and the Iran-Iraq war. More than 6 million barrels of oil were removed from world supply. Oil prices rose from $50 to $115 per barrel (in real 2015 dollars) between January 1979 and April 1981. Then, new production from the North Sea, Mexico, Alaska and Siberia flooded the market. By March 1986, prices had fallen to $27 per barrel.  OPEC cut production by 14 million barrels per day but oil price was unaffected because of a combination of demand destruction, crippling interest rates, and new supply from non-OPEC countries. Prices did not begin to recover until 2001.

So far, the current oil-price collapse is nothing like this.  Surplus production is about 1.0 to 1.5 million barrels per day, interest rates are near zero, and demand recovery appears strong from early data.

The oil-price collapse and Financial Crisis of 2008 were preceded by 11 consecutive months of relative supply deficit and price increase (Figure 1 above). This was largely because of a surge of consumption by China and low OPEC spare capacity. Oil prices approached $150 per barrel in June 2008, the highest price ever reached, and then collapsed below $40 by February 2009.  

The record price of oil was an underlying cause of The Financial Crisis. It increased the cost of global trade, produced inflation and higher interest rates that contributed to real estate loan defaults, and caused demand destruction for oil and other commodities.

Weak demand for all commodities and loans remains a chronic artifact of the years since 2008 despite the best efforts of central banks to correct the problem.

Oil prices rebounded fairly quickly after 2008 because of a 4.2 million barrel per day production cut by OPEC in January 2009 (Figure 1). Another reason for increasing oil price was the devaluation of the U.S. dollar by the Federal Reserve Board by lowering interest rates and increasing the money supply. The chart below shows Federal Funds interest rates and the price of oil.

Federal Funds Rate & CPI-Adjusted Oil Price
Figure 3. Federal funds interest rates and WTI oil price in 2015 dollars, January 2000 – January 2015.  Source: Board of Governors of the Federal Reserve System, EIA, U.S. Bureau of Labor Statistics and Labyrinth Consulting Services, Inc.
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Oil prices rose with a weak U.S. dollar and interest rates near zero in 2009. Other factors, notably the Arab Spring uprisings in the Middle East, also contributed to the price increase.

As prices passed $80 per barrel in late 2009, tight oil production began in earnest. Low interest rates forced investors to look for yields better than they could find in U.S. Treasury bonds or conventional savings instruments. Money flowed to U.S. E&P companies through high-yield corporate (“junk”) bonds, loans, joint ventures and share offerings. Although risk was a concern, these were investments in the United States that were theoretically backed by hard assets of oil and gas in the ground.

In the first half of 2012, flagging demand caused a relative supply surplus of 3.5 million barrels per day (Figure 1 above). WTI oil prices dropped below $90 but by early 2013, prices returned to the high $90-to-low-$100 per barrel range. 

Tight oil boomed after late 2011 when oil prices moved higher than $90. An endless flow of easy money was available to fund spending that always exceeded cash flow. The table below shows full-year 2014 earnings data for representative tight oil E&P companies.

Oil-Weighted Sampled E&Ps 2014 10 March 2015
Table 1. Full-year 2014 earnings data for representative tight oil exploration and production companies. Dollar amounts in millions of U.S. dollars. FCF=free cash flow; CF=cash flow; CE=capital expenditures. Source: 2014 10-K filings, Google Finance and Labyrinth Consulting Services, Inc.
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These companies out-spent cash flow by 25%, spending $1.25 for every $1.00 earned from operations. Only 3 companies–OXY, EOG and Marathon–had positive free cash flow. Total debt increased from $83.4 to $90.3 billion from 2013 to 2014. Debt must be continually re-financed on increasingly poorer terms because it can never be repaid from cash flow by many of these companies.

The U.S. E&P business has, in effect, become financialized: investment in this class of company has become the sub-prime derivative of the post-Financial Crisis period. There is no performance requirement by investors other than the implicit need to maintain net asset values above debt covenant trigger thresholds.

These terrible financial results reflect a year when average WTI oil prices were more than $93 per barrel. First quarter 2015 earnings will make these results look good. 

The immediate cause of the present oil price collapse is found in increasing production and, to a lesser obvious extent, decreasing demand that began in January 2014 as shown in the chart below. Markets react slowly and it was not until June 2014 that prices began to fall.

World Liquids_Supply-Demand 2013-15
Figure 4. World liquids supply and demand, July 2013-February 2015:  Source: EIA and Labyrinth Consulting Services, Inc.
(click to enlarge image)

This was the manifestation of longer-term demand destruction following nearly 3 years of oil prices above $90. The chart below shows the same world liquids data as in Figure 1 but with demand (consumption) expressed as a percentage of supply (production).

Chart_Cons PCT_Demand PCT of Supply WTI CPI 3 April 2015
Figure 5. World liquids demand (consumption) as a percent of supply (production) and WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars, 2003-2015. Source: EIA, U.S. Bureau of Labor Statistics, and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Figure 5 shows that demand as a percent of supply was generally increasing until about September 2007 and has been generally decreasing since then. Expecially weak demand since early 2014 is merely the most extreme expression of a trend that has been active for more than 7 years.

The present oil-price collapse is, therefore, because of long-term high oil-price fatigue. It reached a crescendo in mid-2008 when oil prices exceeded $140 per barrel but was not specifically recognized as more than another of the factors that contributed to the Financial Collapse that followed. It is now clear that oil price was a central cause of that collapse.

The artificial low interest rates that have been imposed by central banks since the Collapse have weakened the U.S. dollar and pushed the price of oil above $90 per barrel for the longest period  in history.

The quest for yields in a low interest rate world led investment banks to direct capital to U.S. E&P companies. Capital flowed in unprecedented volumes with no performance expectation other than payment of the coupon attached to that investment. Tight oil boomed despite poor financial performance.

The current oil-price collapse is because of expensive tight and other unconventional oil and the market’s inability to support its cost. $90 per barrel WTI price appears to be the empirical threshold for demand destruction. Only the best parts of core areas of the Bakken and Eagle Ford shale plays make some profit at $90 per barrel and almost nothing makes money at present oil prices.

Low price will eventually cure weak demand. At the same time, the effect of reduced oil and gas spending on the U.S. economy is unclear but a weaker economy could lower demand despite low prices. Allen Brooks and Euan Mearns have explained the case for demand destruction in excellent detail.

The present oil-price collapse is severe because of the accumulated, long-term price fatigue that has existed since late 2007. Although the immediate cause of the collapse is over-production of tight oil, the key to recovery is demand.

Demand is more difficult to cure than over-supply so that is where efforts must be directed. Over-production of non-commercial tight oil must slow and eventually stop before the market can balance itself. I am more optimistic than most that this is already underway but it distresses me to see increased capital flow thus far in 2015 to what Christopher Helman aptly calls “zombie” companies.

The problem is structural and systemic and firmly rooted in the irresponsible funding of under-performing U.S. tight oil companies since at least 2010. The first step to price recovery is the severing of capital supply to companies that could not fund their operations from cash flow when oil prices were more than $90 per barrel. If this does not happen, we could be in for a long period of low oil prices.

*The Brent crude oil pricing system did not exist before 1987.


  • Hi Art,

    Thank you for sharing your work with us. I just had a question about Figure 4. You’re saying that this chart shows demand destruction. I’m having trouble seeing that. Crude demand is seasonal. So, as long as demand in each month is greater year over year, then what we are seeing is increasing demand. Though it is a limited data set, that appears to be exactly what Figure 4 shows. It’s true that supply is greater than demand after the line you’ve inserted, but that’s not the same as demand destruction. That is simply oversupply due to supply growth exceeding demand growth. Right?

    What am I missing?


    • Arthur Berman


      Thanks for your comment. That is why I stated “to a lesser obvious extent, decreasing demand.” When supply and demand are viewed in absolute values, you are correct and that is what misled me for several months. Demand is increasing in Figure 4 but production is increasing more so relative demand is actually decreasing.

      Figure 5 shows the more telling perspective where demand is expressed as a percentage of supply and, there, it is clearly decreasing.

      All the best,


  • […] Oil Price Collapse Due to Expensive Tight Oil […]

  • Mike

    Mr. Berman, as an oil and natural gas producer of convention resources for over a half century, my compliments on this article, sir. The shale oil industry shot itself in the foot, and producers like myself in the back. Thank you.


  • Joules Burn

    Hi Art,

    The problem I have with any direct causality argument is that we are faced with identifying a signal against a very noisy background. There are many sources of “noise”, the largest one at present being Saudi Arabia’s decision to keep their production up despite the falling price. It may very well be that the world economy as it is currently structured cannot support the oil price necessary to enable much of the tight oil production, and also that massive debt has enabled LTO overproduction, but identifying what that price level is made difficult when one producer is not constrained by the same economics.

  • John

    Mike, When the fallout finally clears, we may find we were shot in the back of the head rather than the back. Somebody is going to take a real beat down eventually on the debt, junk bonds and other private equity offerings and I don’t think it will be the investment bankers that created what will become an unholy mess.

    My fear is that it may take years for normalcy (whatever that is) to return to the oil patch and if that happens we will all suffer our fair share

    Art, Thank you for your advocacy over the last 6 or 7 years. I know that could not sustain the personal attacks or pressure you have endured from both the financial and the industry prestitutes.

  • As explained in a paper by Baumeister and Kilian from last February (“Understanding the Decline in the Price of Oil since June 2014″) there are two major and quite equivalent factors to the oil price crash; fast increased oil production in the US (a positive supply shock) and a slowdown in oil demand in the first 6 months of 2014 (due to economic troubles). The IEA is now expecting a slow-down in oil demand in the first two quarters of 2015. Jeremy Grantham has for some years been warning about that new oil exploration has become so expensive, it is starting to withhold the future possibility for GDP growth. It looks like his forecast is becoming a reality.

  • rex patel

    Thanks Arthur for very interesting article. I’m surprised that some LTO companies are finding additional funding with their negative cash flow and lower WTI oil prices . Rig count in Bakken Eagle Ford and permian shale basins have down significantly though rate of decrease in rig count has slowed down in ladt two weeks. Do you have any update thoughts about your prior article expecting production decline of 600000 barrels of oil per day from LT0 by June? Thanks again

  • Conrad Maher

    Another outstanding article by Art Berman and I am always envious of his charts, tables and graphs. They have real technical impact and are such elegant displays that they are a joy to use. Having worked in Libya when Khadaffi came to power and in the north sea when the big fields were brought on stream. They have wonderful history and looking at the charts with inflation correction is also very instructive.

  • Seth

    The oil collapse was precipitated by a flood of shale oil produced at rates well below the going rate per barrel otherwise there would be no shale revolution.

    Despite a barrage of articles always positioning shale oil in some kind of negative light, U.S. oil production continues to increase month-to-month, while the cost of producing shale oil continues to drop. The average cost per barrel for shale is $44 and dropping due to advances in technology, big data, and process improvements. What this means is even if the Iranians flood the market and the cost drops to $35, for example, there are shale plays in the Permian, and elsewhere that cost less than $35 per barrel to produce, and the rest of the massive shale holdings in North America act as a de facto cap on future increases.

    I hope oil drops to $25 a gallon and crushes the economies of bad actors like Russia, Venezuela, and the Mideast terror-financiers. We can thank American ingenuity that created the shale revolution.

    • Arthur Berman


      Check your source of information.

      Read any tight oil company’s annual report and find one that claims that its cost is $44/barrel or anything close to it. You won’t find any company making that claim because it’s not true (unless you don’t count any costs, of course).

      “Closed for Business” — Oil Prices Force Bankruptcy Filings in Oil Country”

      Increasing production doesn’t say anything about profitability. It just means that someone is providing money so the drilling can continue. Anyone will loan money if the interest rate is high enough.

      Thanks for your comments.


  • So many things wrong.

    First, correlation does not imply causality. Your statment ” It is now clear that oil price was a central cause of that collapse.” is not supported by any evidence.

    Your prejudices show in your statement ” irresponsible funding”. What an interesting assumption. Median costs of tight oil production have decreased by a third in the last year. Many wells are profitable even as low as $30.

    “The first step to price recovery is the severing of capital supply to companies that could not fund their operations from cash flow when oil prices were more than $90 per barrel.”

    Again, a simplistic analysis. If a company is rapidly lowering its costs and/or increasing its production it may well be a worthwhile investment. Alternatively, a company could bet that its financial reserves will enable it to outlast competitors picking up assets at firesale prices.

    Finally, your analysis completely ignore proven and rapidly depoyable assets in the ground., ie a fracklog of more than 3 million b/d. That capacity has value, even if not the cost to the company and may well be a prudent basis for loans.

    We clearly are in for a long period of low* oil prices, absent war in the middle east or other factors. But since when is that a bad thing?

    • Arthur Berman


      I offer you the same advice that I gave to Seth: check your sources of information.

      Do you base your beliefs about tight oil profitability on opinions that you read or on data?

      Based on data, the average well in the core 4 counties of the Bakken requires $70 per barrel WTI to return 7% IRR for an average EUR of 500,000 boe (this is a very optimistic reserve, by the way). This includes $9.4 mm drilling and completion cost, $9.75 per barrel lease operating cost, $3.10 per barrel G&A cost, 20% royalty, 10.8% production taxes, no income tax and no land cost, and a -$10 per barrel differential to WTI price.

      If you have data that shows something different, please state it. Your claim of $30 per barrel as a profitable price requires huge variance from the information that I have shown. You can’t just wish it to be true.

      You also must reconcile your belief about tight oil profitability with the financial data in Table 1. You can check the data at Google Finance. All companies except EOG, Marathon and OXY are losing money at $93 per barrel and increasing debt from last year. If they are profitable at $30 per barrel, we should see positive cash flow but we do not.

      You don’t have to agree with my interpretations but if you disagree with the data I present, you must support that disagreement with data.

      All the best,


  • Seth


    Thank you for replying to my comment. Most oil production in the Bakken shale formation remains profitable at or below $42 a barrel, according to the Paris-based International Energy Agency, and some areas as low as $29. Therefore, there are patches that have higher costs, and some areas that have lower costs which means that even if oil drops to $35, shale oil is still profitable in some areas, and other areas will continue based on hedging, and the relentless lowering costs of shale oil production.

    Here’s a quote from you from 2013:
    “The early exuberance about shale oil is beginning to look irrational. “I look at shale as more of a retirement party than a revolution,” Art Berman, a former 20-year veteran petroleum geologist at the former Big Oil producer Amoco, told Bloomberg BusinessWeek recently. “It’s the last gasp.”

    Last gasp, huh? The only thing we know for sure, is you will continue writing negative stories about shale, and U.S. oil production will continue to increase.

    Again, thanks for replying to my comment.

  • Seth,

    It looks to me like you are only here to argue with someone because you don’t like what he has to say. If you are interested in getting to the truth, I would suggest you follow Art’s advice and read through some financial statements from shale producers. Many of them were losing money when oil was closer to $100 per barrel.

    You don’t have to accept Art’s articles at face value. But you shouldn’t dismiss them outright because you have pre-conceived notions and would experience cognitive dissonance if you were to actually consider what he is saying. You found one highly questionable source (yes, IEA cited $42 per barrel, but the original source of that information was the state of North Dakota) and that was enough to dismiss all of the information, data, and analysis Art gives in his presentations? If Bakken oil is profitable at $42 per barrel, then why did Whiting Petroleum, one of the largest producers in the Bakken, report a loss of $353 million last quarter?

    The company has reportedly put itself up for sale, only to find that no one was interested:

    As a group, all shale producers have spent years now taking on massive debts and generating negative free cash flow – and that all went on while oil prices were high! Common sense can tell you that something is amiss! Art’s presentations explain in some detail what is amiss and why. You just have to listen to them with an open mind.

    If you work in the industry, I don’t blame you for having a pre-set agenda. However, if you are investing in some of these shale companies, you might want to go tough out the cognitive dissonance in order to consider opposing viewpoints!

    Best Regards,

  • Seth


    Thank you for your measured comment, and for allowing me to hold a dissenting view. My point is that Art has been consistently spinning a negative point-of-view on shale for years ( “It’s the last gasp” comment from 2013 that is especially entertaining). Art always says to quote facts, and the relevant fact is the increasing monthly oil production despite Mr. Berman’s continued sky-is-falling pronouncements.

    Last gasp? LOL

  • Seth,

    I agree that he has a very negative outlook on the economic viability of shale, but I think that comes from his own analysis and interpretation of the data. I really don’t see any misinformation coming from him. I do see misinformation and hyperbole coming from shale E&P executives:

    (if interested, look at the last 4 paragraphs at the post linked above where I give an example of what I mean)

    As for his “last gasp” and “retirement party” comments, I don’t see them as bias-driven hyperbole. That just seems to me to be his honest view of the situation and it’s one that makes a lot of sense in light of the data he presents.

    The only thing where I have really found reason to question him is with his focus on free cash flow. Conceptually, companies that are in growth mode will produce negative free cash flow as they make investments. However, Art does recognize this point and counters that with oil prices as high as they have been, you would expect some positive free cash flow at some point. Healthy companies like XOM and CVX produce massive amounts of free cash flow when oil prices are high, even though they are also constantly reinvesting massive amounts in their businesses. That’s because their cost per barrel isn’t $60, 70, 80, or even $90+ like it is with a lot of the shale producers. There is a reason why those companies have to constantly tap capital markets in order to fund new production. Because their businesses aren’t funding it.

    Consider this. Worldcom blew up because it was classifying operating expenses as capital expenditures. It seems to me that shale producers might be basically doing the same thing with much of their spending on new wells, and unfortunately, it is within the rules for them to do it. Even though they may be technically within the accounting rules on that particular point, that doesn’t mean the companies are economically healthy or that the investments they’re making will generate a positive return.

    As for the larger shale producers that do show profitability (in terms of net income) when crude prices are high, I question whether that is due to the fact that they are able to drill a well, classify much of that spending as capex, then enjoy most of the revenues that well will ever produce in the first year – against a backdrop of multi-year depreciation on the “capital expenditures” associated with that well. If this is the case, then those wells will not generate profits for the majority of their useful lives (i.e. on the back half or maybe even 3/4), but will instead operate at an accounting loss. However, this can be masked by constantly growing production (i.e. by drilling more and more new wells!).

    Insurance companies can do something similar, and unfortunately, it’s difficult to police because they can claim ignorance of the truth about their costs, since they are based on estimates in the beginning (sound familiar? It should – EUR are estimates!). They can basically mask bad investments through growth. An unscrupulous management team in that industry can experience rapid growth by underpricing competitors. Then, they can report profits because a lot of the expenses are back weighted (in other words, revenues are collected up front, claims are paid out much later). In the case of shale E&P, a similar situation exists because estimates of future revenues are just that – estimates. Back to the insurance guys, this “trick” won’t catch up with them for a long time as long as they are still growing rapidly. But at some point, it blows up in their faces and investors go home broke.

    However, in the meantime, this strategy is great for the executives of the company because they earn huge salaries and bonuses and the value of their stock option goes through the roof. It pays big time in corporate america to keep everyone fooled. In the end, the executives claim ignorance and stock and debt holders get screwed.

    Caveat Emptor!

    – Chris

  • Seth


    I greatly respect your viewpoints and you should be writing columns. While there are unquestionably hucksters and fraudsters in the shale oil business, the fundamental economics of shale are very sound. Even if oil plummets to $20, shale serves a purpose by maintaining a ceiling on future prices, and providing a humongous strategic reserve that can be tapped when prices rise.

    I am not in the energy business and I never invested in energy stocks as I’m a boring index investor, happy to be part of the 90% of indexers that beat actively managed portfolios. My interest in shale is simply a fascination of this energy revolution that has saved our economy, and put a major crimp in trouble-makers like Russia, Saudi Arabia, and Venezuela. I also look forward to the day when wind, turbines, solar, tide, geothermal and other renewables completely replace fossil fuels. What’s also interesting is how our move from coal to gas (thanks to fracking) power generation has reduced air pollution levels below the Kyoto Protocol (how ironic) while Europe is still heavily reliant on dirty coal — until they move to renewables.

  • Seth,

    First, thank you for the compliment. Second, I do understand where you’re coming from. However, I would counter by saying first, that much of today’s shale production is not economically sound. So, we disagree about that. But, think for a second about what your position would be if you agreed with me (and Art). You should want to go and tell the world because if that capital wasn’t flowing into so many loss making investments in shale, that same capital could be flowing into economically feasible, long term investments such as offshore fields. Large discoveries in that space have the potential to usher in a more permanent era of low oil prices, rather than this boom-bust-boom-bust cycle we’re likely to see with shale now being the new swing producer.

    Any oil coming out of the ground seems good for consumers (and therefore society) until you consider that bad investments aren’t actually good for an economy long term. Or, maybe I should say, it would be better for that capital to flow into good investments that will create more long term jobs (e.g. offshore fields) and production.

    Beyond the broader benefits to society of having capital flow to the right places, I also hate to see individual investors lose money because of unscrupulous people. So, to the extent I try to warn people of the truth about these shale companies, it is not for any self-centered reason. I suspect the same is true for Mr. Berman. He also talks about the painful situation we will face in the future when we’ve planned for all this cheap, plentiful domestic oil and gas, but we end up with something much different – all because everyone bought into a huge bubble, hook, line, and sinker! In America, we do love to hype up bubbles, that’s for sure!

    – Chris

  • Seth


    Thank you for your measured response and I base my opinions based on the Paris-based IEA, for one:

    Specifically, IEA predicts that the U.S. will be the number one source of oil supply growth worldwide up to 2020. Van der Hoeven pointed to the decision by the Organization of Petroleum Exporting Countries (OPEC) in November to keep production levels steady instead of decreasing them to balance international market trends, which she says “may have effectively turned [light, tight oil] into the new swing producer.”

    Energy companies will invest where the return is greatest and it will be interesting to see the long-term impact of offshore drilling off the U.S. Atlantic Coast, among other plays.

    One can make the case that the real “bubble” is the oil price deflating from $140 to the current price. Even if the price drops to $15 a barrel, the benefit to manufacturing and consumers will be massive – to energy companies it will be a disaster and that’s fine with me as shale will have served a valuable service as a de facto cap on future increases.

    Remember that before 2007, nobody except a few insiders knew about the upcoming shale revolution. There is a shale equivalent to “Moore’s Law” in that technological, big data, and shared process improvements bring about a relentless improvement in “fracking,” and this brings the price of shale down over time. It’s a pretty safe bet that there will be continued, significant improvements to fracking over time.

    GE is investing billions in fracking and they are hardly a fly-by-night operator.

    “One of America’s corporate giants is investing billions of dollars in the new boom of oil and gas drilling, or fracking. General Electric Co. is opening a new laboratory in Oklahoma, buying up related companies, and placing a big bet that cutting-edge science will improve profits for clients and reduce the environmental and health effects of the boom.

    “We like the oil and gas base because we see the need for resources for a long time to come,” said Mark Little, a senior vice president. He said GE did “almost nothing” in oil and gas just over a decade ago but has invested more than $15 billion in the past few years.”

  • One more comment for Seth (or anyone else who is doubting the reality of Mr. Berman’s assertions)… take a look at page 9 of this presentation that Schlumberger’s CEO made last week:

    According to his table, “tight oil” or shale producers spent somewhere around $77 in capex (my best read of the chart) for every barrel of oil they produced (contrast to conventional wells at $15/capex per barrel). As Mr. Berman is always pointing out, that completely ignores all the many other costs associated with producing oil such as depletion, taxes, royalties, well maintenance, waste disposal, and “general and administrative expenses”.

    So, that’s an awful lot of capex spent per barrel of oil produced. Granted, they were growing production and it has continued to grow during the very first part of this year. But, that “growth” is very short lived in light of the decline rates. Most of the time, when companies make capital expenditures to grow their revenues, those revenues don’t fall off a cliff after the first year.

    So, the problem is as I was trying to describe above – these companies are spending massive amounts of “capex” – most of which probably is better characterized as operating expenses. They can continue doing this as long as debt and equity investors continue to believe in them enough to fund more and more capex. In that respect, it starts to resemble a giant ponzi scheme. Of course, low oil prices should be the perfect “cure” for this problem. Maybe the problem will be cured this time around, and maybe not. If prices bounce back quickly enough, this whole thing could keep going through another cycle. Of course, I suppose these numbers (roughly $77 per barrel in capex) could somehow be misleading us, but I don’t see how. I suppose time will tell for sure. Hope everyone has a great evening! – Chris

  • Seth

    There are two constants:
    1) Relentlessly negative spin on shale oil focused on declining rig counts, selected quotes from annual reports, and other criteria – as if shale is a negative phenomena instead of a historic revolution with a transformative impact on the U.S. economy and as a strategic weapon depriving terror states of the capital they need to sow terror around the world.
    2) Increasing U.S. oil production every single month.

    I am betting that both 1) and 2) will continue. After all, just two years ago, Art Berman predicted that shale oil was at the “last gasp” stage.

    “Crude oil production in the US increased by the largest volume for more than 100 years during 2014, helped largely by the shale oil boom in the country that has already changed the energy map of the world.

    During 2014, US oil production increased by 1.2 million barrels per day to 8.7 million barrels per day, representing the largest volume increase since record keeping began in 1900, the US Energy Information Administration (EIA) said.

    On a percentage basis, output in 2014 increased by 16.2%, the highest growth rate since 1940.

    Most of the increase during 2014 came from tight oil plays in North Dakota, Texas, and New Mexico where hydraulic fracturing and horizontal drilling were used to produce oil from shale formations, the EIA noted. The US shale revolution dramatically increased oil production in the US, and has transformed the country into a net exporter.

    Crude oil production in the US has increased in each of the previous six years, the agency added.”

  • Hi again Seth,

    I’m just going to be really honest here. It sounds to me like you are the one spinning:

    “as if shale is a negative phenomena instead of a historic revolution with a transformative impact on the U.S. economy and as a strategic weapon depriving terror states of the capital they need to sow terror around the world.”

    You’re using a lot of really descriptive words, and drawing some pretty major conclusions about the effects of shale boom on our economy, world peace, etc., – but you’re not really giving any data or analysis to back up those claims. I also think you are missing the point of what Mr. Berman does. Take some time to watch this full presentation if you really want to understand his full message and why he’s spreading it:

    To me, it seems that his primary agenda is to tell the truth about an “phenomenon” that most other interested parties are “spinning” to fit their agenda! He’s not doubting that the oil is there. He’s not doubting that it can be pulled out of the ground. He’s only making (a very strong) case that most of it isn’t economical.

    As for all the supposedly wonderful effects of the shale boom, I think I’ve given you plenty of food for thought regarding why the shale revolution isn’t nearly as positive as you may have believed, but it seems to me that you’re determined to discount or even ignore the information and comments I shared. In my view, our society, and indeed the world, would be better off if all that capital were flowing into economically sound investments, i.e. into offshore fields that truly have the potential to accomplish long term the very things that you seem to believe shale is going to accomplish. That Schlumberger presentation makes the case that there are plenty of technological and structural improvements in offshore that could be made to bring the cost per barrel down significantly in that space – and that’s where all the major new discoveries are! Since 2010, 63% of new discoveries have been made in deepwater, and another 15% in shallow water. That means offshore has accounted for 78% of new discoveries since 2010 (and was 68% of new discoveries from 2000-2010). However, much of those new discoveries aren’t being developed yet. Why? Because 40% of today’s capex is flowing into uneconomical shale wells that produce very little over the long term! If that money were flowing into offshore fields, where it should be flowing, the world might actually have plenty of (reasonable cost) supply going forward. Instead, we’ve got massive amounts of money flowing into shale which provides, by far, the lowest return of energy per dollar invested.

    I can’t force you to see that. I will say that your responses shed light for me about how this shale boom has been able to continue for so long. People desperately WANT to believe in it!

    By the way, I hope there’s no hard feelings here. It’s okay with me that you don’t agree with me. I hope you have a great day!

    Best Regards,

  • Seth,

    Just wanted to clarify my last comment. I do see that you are giving production numbers to back up your view that the tight oil is a wonderful development for the U.S. and the world. The thing is, no one here disagrees with you (or the EIA) that the production exists. Again, I would say to watch that presentation I linked above if you’re really interested in this topic. I think it will help clear up some confusion.

    Best Regards,

  • Seth,

    Two more comments (sorry, it was the middle of the night and I meant to note these two things earlier – new baby at home means I’m keeping weird hours):

    First, the U.S. is not a net exporter of crude. We aren’t an exporter at all. It is still illegal for 99% of U.S. production to be exported (I think there are minor exceptions to the law in a few instances). We are still importing around 7.5 million barrels of crude per day currently. I think maybe the confusion is that we are a net exporter of refined products, but all that means is that we have excess refining capacity in this country.

    Second, I think you maybe misunderstand the “last gasp” comment. Saying that most of the oil trapped in shale formations is not economical without much higher oil prices (which is what Mr. Berman is saying) is not the same thing as saying that it isn’t there (which appears to be how you have interpreted that comment).

    Best Regards,

  • […] the way, I also have recently been sharing more detail about my views on the shale boom via Art Berman’s website. You can find the full debate I had in the comment section of the page at that last link. I figured […]

  • Gibs

    Awesome blog. I enjoyed reading your articles. This is truly a great read for me. I have bookmarked it and I am looking forward to reading new articles. Keep up the good work.

  • Art,

    It’s my pleasure to comment here, and thank you again. I really find value in the work you do.

    Best Regards,

  • Nat

    Many thanks for this interesting article. It seems to me that rather than oil price fatigue, the price collapse stemmed from the tapering of quantitative easing (QE) from the Fed. This caused the dollar to surge to the detriment of dollar borrowing oil consumers worldwide. Indeed, following the 2008 Great Recession the world became awash with borrowed dollars through QE which boosted the oil price as well as demand. The Fed’s QE tapering destroyed oil demand. My conclusion would be that the world was only able to afford unconventional oil production thanks to the Fed’s QE which followed the 2008 crisis. The Fed’s QE also had the side effect of financialising the US E&P sector as you describe.

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] Some of my readers dispute the poor economics of these plays based on incorrect notions of break-even profitability–some believe that tight oil plays are profitable at $35 per barrel oil prices (see comments from my last post). […]

  • […] Some of my readers dispute the poor economics of these plays based on incorrect notions of break-even profitability–some believe that tight oil plays are profitable at $35 per barrel oil prices (see comments from my last post). […]

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher […]

  • […] Some of my readers dispute the poor economics of these plays based on incorrect notions of break-even profitability–some believe that tight oil plays are profitable at $35 per barrel oil prices (see comments from my last post). […]

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