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Shale Boom, Shale Bust: The Myth of Saudi America

Having read his earlier book, Oil’s Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy, in 2011, I highly recommend Dan Dicker’s latest book, Shale Boom, Shale Bust: The Myth of Saudi America. Please note that both links are Amazon affiliate links.

Up until the latter part of 2014, the American shale oil boom seemed to promise that North America would become energy self-sufficient. However, just as we began to prepare to welcome 2015, OPEC began to increase its production thus lowering the price of crude oil, in order to regain its historical market share. This change posed a significant threat to the US shale oil industry. Dicker’s book walks us through the shale oil story.

The first chapter, “Saudi America,” provides the foundation for the shale oil story. It begins with US Energy Information Administration graphs depicting expected shale gas and oil production. Then, a broader picture is developed showing a cost curve for various sources of oil found across the globe. Because shale oil is more expensive to produce than conventional OPEC oil, the United States can never live up to the hype of Saudi America.

The next chapter, “Shale Oil Is a Ponzi Scheme,” begins with a discussion of shale oil decline rates. Shale oil production declines rapidly, with more than half of an entire well’s production occurring within the first two years. The first six months of a well are the most prolific. Thus, shale oil is much like a Ponzi scheme in that more wells need to be drilled simply to stay ahead of the massive declines in production.

The third chapter, “Shale Scalability and Results,” discusses the economics of oil shale. With its lower upfront costs and fast quick production profiles, shale oil drilling will be quick to react to changes in oil prices. When prices are sufficient, activity is brisk with economic shale oil production. When prices are low, the converse is true. Coming into 2015, some of the shale oil players were hedged. That hedge allowed them to continue throughout 2015 without the full burden of lower oil prices. As shale oil producers work their way through 2015 and much of their hedges, they will collide head-on with declining production and lower prices.

The next chapter, “The U.S. Export Ban on Oil,” provides a historical background about why oil exports were initially banned and why, in Dicker’s view, they should continue to remain banned. A key underpinning argument is that shale oil is a limited resource.

The fifth chapter, “The Collapse of 2014 Oil,” discusses the reasons why oil prices tanked. Dicker identifies the following five reasons, listed in no particular order of importance:

  1. The rising strength of the US dollar;
  2. The defensive market share posture of Saudi Arabia within OPEC;
  3. The increasing production of US shale oil and resultant global “oil glut”;
  4. The continuing malaise of China and European economies; and
  5. The demise of US investment banks’ commitment to oil marketing—the hiatus of the endless bid.

Each is described in further depth.

The sixth chapter is a continuation of the earlier chapter. Each of the five factors is explored and analyzed for its effect. I found the fifth reason along with the effects especially interesting because I had neglected to consider it prior to reading this book.

“Three Phases to Shale Bust” is the next chapter. The chapter begins by discussing how oil prices can move to extremes, both on the upside and downside. Next, “Phase 1: Living Through the Oil Price Crash,” covered the period starting from early 2015. “Phase II: The Capital Chase: Cutting Jobs, Raising,” discussed the industry’s reaction to low oil prices. Last, “Phase III: Consolidation of Asset Ownership,” which is close to where the industry is now as I write this review, outlined expected developments as many companies face the inevitable cash crunch.

The old saw is that the cure to low prices is low prices and the cure to high prices is high prices. With the cure of low prices forcing consolidation, the seeds for the next oil boom have been sown. “The Next Boom” discusses the onset of the recovery. This eighth chapter discusses the expected global oil demand that exceeds the existing base production. That then leads to capital expenditures to increase production to meet future demand. Dicker outlines some key assumptions that support his position.

After the eighth chapter, Dicker presents “Conclusions,” where he states the “…United States is not one step closer to finding a unified energy policy that works, and the U.S.—despite its tremendous success with shale—is going to end up without the energy independence from foreign oil it craves. In my opinion, Washington and particularly the President are to blame for this.” He then goes on to provide more detail and some ideas for policy considerations.

His final chapter, “Addendum: Boom Bust Investing,” covers three key topics for investors who want to capitalize on the changes in the shale industry. “Investing in Exploration and Production ‘Survivors’” is as the title suggests: Invest in those companies that will survive. In his book, Dicker mentions specific companies for consideration. Next, “Investing in Pipeline Companies” is covered. And last, “Investing in the Cash-Rich and Opportunistic” discusses investing in those companies that are to take advantage of this downturn.

Again, I highly recommend Dicker’s book. Through his years of experience of being an oil trader and investor, he will provide you with thought-provoking material.

{ 2 comments… add one }
  • DIANE January 8, 2017, 1:54 am

    Phase III:
    “Consolidation of Asset Ownership,” which is close to where the industry is now as I write this review, outlined expected developments as many companies face the inevitable cash crunch.” Sept 2015

    The Question is, today, Jan8, 2017, do we remain in Phase 3? It is taking an incredibly long time to consolidate the industry and the expected crash and burn end-game for the many companies that were loaded with debt, and not expected to survive, are continuing to issue new rounds of paper, as low interest rates have been slower than expected to increase. Looking back to Sept 2015, the numbers of interest rate increases (2) is far below the Fed (Fake-promises) of 3-4, presented in 2016 alone. …and how will the election of DT change the time-line health of the industry? Will he and his energy cronies make the “Fracking of America” great again? And will the power of the almighty buck, increasing interest rates, and “back to energy independence”, keep the energy-emerging markets i.e.: Mexico/Venezuela and their currencies, in a continued downward spiral? Did we somehow get to the end of the cycle and begin a recovery/ BOOM! without the usual “throw up in your mouth”, indigestion phase? I was actually looking forward to that phase, with a shopping list of companies to buy. How could it have passed me? …or is it yet down the road?

    • Stecyk January 8, 2017, 12:26 pm

      Hello Diane, you’ve asked a lot of questions. Let’s try to answer them.

      Do we remain in Phase 3?

      No, I think we’ve left Phase 3 and are now in recovery phase. Phase 3 was prolonged by a lot of private equity capital. Some companies have crashed and burned while many others are much weaker. With higher oil prices, however, I expect companies to strengthen in the coming months.

      How will the election of Donald Trump change things?

      I don’t know. I doubt that even Trump knows yet. We will have to wait to see how he reviews/changes current legislation in the United States, sanctions against various countries, and his policies toward the Middle East, just to name a few.

      What about Mexico and Venezuela?

      I don’t follow either country particularly carefully. That said, I know that Venezuela is effectively a failed state. There’s nothing good about that statement. The amount and degrees of human suffering are intolerable. Many will be quick to claim that’s what happens when you have socialism or whatever. I believe the problems run far deeper and are far more complex. Regardless of the true root causes of the problems, many innocent people are suffering. How or when does it end? I don’t know. It’s truly a heartbreaking situation.

      Has the ultimate capitulation phase already passed?

      I believe so. With prices at or above $50 per barrel, most companies should begin to strengthen their balance sheets. Some of the stronger companies might go on the prowl for weaker, more distressed companies or increase their exploration budgets. For most companies, if they have made this far, they are likely going to survive, unless they get bought out.

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