In the following you will find our translation of a column from RIA Novosti with commentary and notes [in brackets] by Vince Dhimos. In a previous column/translation, I had said that the belief that shale oil would make the US energy-independent and the world’s no. one oil producer is one of the mainstays of American ideological conservatism. I must add to this that ideological conservatism is radically different from plain vanilla conservatism, the best example of which is found in today’s Russia, whose president once said in an interview that he has no ideology at all, just solves problems as they come. And solving problems with common sense and reason is the essence of true conservatism – a dying way of life in the US, though ideological conservatism still calls itself conservatism, and therein lies the confusion afflicting Americans and the attendant failures in economics and foreign and domestic policy. Experience teaches that ideologies do not solve problems, they create them. But the lesson is lost on most Americans. Meanwhile, America is losing the shale oil effort even though it can claim the title of no. one oil producer! That is really quite extraordinary to say the least, especially since the US is losing the “oil race” to none other than the non-ideological conservative Russia, where no fracking is necessary in the oil production process and the product is profitable. You can bet your boots the pragmatic President Putin would never bet on shale oil in his country unless the non-shale oil in his country and the rest of the world were almost depleted. What the US ideologues forgot, of course, in their zeal to drive their round peg of shale production into the square hole of market economics, was the cost factor that makes shale oil unprofitable at this point in time. In the broader sense, it is this failure – or shall we say inability – to ponder the whole picture that causes the US elites to fail in all areas, ie, war, military arms acquisitions, foreign policy, diplomacy and general economics.
And you know the real crying shame of all this?
Some day in the not-too-distant future, oil in the Middle East, Russia and Venezuela could become scarce and the higher prices generated as a result could make US shale oil profitable. But with all the current haste to pump it all out at zero profit, it could be almost all gone by then! America could have been truly energy-independent at that future time, and could have been great again. But for politics and ideological conservatism in the early part of the century when the time was not yet right. A chance has been lost forever.
The Price of Independence: Bankruptcy Wave sweeps over US oil Sector
Aug 21, 2019
MOSCOW, Aug 21 - RIA Novosti, Natalya Dembinskaya. While the United States is breaking records for oil production - nearly 12 million barrels a day, an increasing number of producers are threatened by bankruptcy. We are talking primarily about shale drilling, to which the market owes such a rapid rise. Already, demand growth has seriously slowed down, and by 2020 a huge glut is expected in the oil market. The price the industry will pay for current record results is reported by RIA Novosti.
Extracting more and more
Global oil demand, increasing at about 1.2 percent per year, is not keeping pace with production. Unsurprisingly: black gold production in the United States increased almost 12% year over the (from 10.96 to 12.45 million barrels a day), and in 2020 another 7.5% is expected - up to 13.39 million.
Twenty years ago, oil demand grew about three times faster than today. But increasing fuel efficiency and the slow-down in China's economic development have changed the situation. [Need I interject here that Trump’s own trade wars are the biggest factor in the slowdown in China that threatens his pet oil dream. Neither Trump nor the rest of the US government seem capable of looking at the whole picture and foreseeing the long-term consequences of their policies] Trump’s current desire to escalate the trade war with the PRC, the largest energy consumer, points to even further slowing.
This is especially critical for small shale companies. Shale wells are rapidly depleted. The people in the business say it is necessary to conduct it as if on the run: constantly drilling new wells in order to maintain production and maintain profitability. Because of this race, the shale industry sorely lacks money both for aggressive growth and for dividends to shareholders. The matter is complicated by the fact that oil prices fluctuate around $60 per barrel, while in the past it was over $75.
As the International Energy Agency (IEA) warned in May, despite the record shale activity, a new market shock awaits them. According to IEA estimates, by the beginning of 2020, the world oil market will face an excess of supply, comparable to that observed in 2014-2015: production will exceed demand by almost two million barrels a day.
OPEC efforts to contain production are not enough, IEA analysts say. That is, prices will continue to go down. This is bad news for shale projects, which are cost-effective, as a rule, at quotes of over $50 per barrel.
As John Hess, the head of one of the largest American shale companies Hess, said in March, with WTI oil prices around $57 per barrel, even a slight increase in the cost of borrowed funds would deprive many companies of their profits. To launch new projects, WTI quotes must be stable at around $60.
In 2010-2014, the development of technology and high oil prices led to an explosive increase in investment in oil production in shale fields. But in 2015, oil fell sharply and shale drillers had to fight for survival. In just one year, about a hundred manufacturers went bankrupt, owing a total of more than $70 billion.
According to the calculations of the American law firm Haynes and Boone, since 2015, 192 bankruptcies of oil producers with debts of more than 106 billion dollars and another 185 bankruptcies of oilfield services companies owed 65 billion have been registered. The reason is low energy prices amid a cyclical downturn in the economy, analysts said. [Not a good time for a trade war!]
Something similar is happening now. From April to June, the price of WTI fell by 23%. And the result was not long in coming: in May, Weatherford, one of the main providers of well drilling services, filed for bankruptcy. California Resources, an oil and natural gas exploration and production company, also had problems. Further, a number of small players, Bristow Group, PHI, Jones Energy and Rex Energy, also went bankrupt, burdened with debt.
However, what is happening on the market suggests that expensive oil from shale oil will not save the day. Despite waves of correction, since the beginning of the year, oil nevertheless added 20.7% in price. But the problems have not disappeared. In early August, a bankruptcy petition was filed by shale driller Halcon Resources. Concho Resources' profit fell 25 percent. Another shale producer, Whiting Petroleum, in an effort to deal with financial problems, announced a 30 percent layoff.
Investments could save the situation, but investors, it seems, have already turned their backs on shale projects.
"Investors from a number of producers with financial problems who suffered as a result of the price crisis of 2015 most likely lost hope that a rise in sale prices would be of help and improve the situation," Haynes and Boone said.
In ten years, the 40 largest industry representatives spent nearly 200 billion more than they earned. Thousands of wells in shale deposits pump much less oil and gas than investors promised. Last year, Wall Street invested half as much in the industry as in 2017. And the leading American investment bank Goldman Sachs warned that by 2025 shale will lose its economic significance: we are seeing "all the signs of depletion."
This is a constant problem. Production in shale deposits is rapidly declining, and the initial productivity is a thing of the past. Therefore, companies have to constantly drill new wells. And this is a huge additional cost.
Another reason for the decline in investment is environmental restrictions on drilling or on the switch to alternative fuels.
“Investors are worried that oil companies are spending money on things that are facing decline. And this is inevitable as electric cars and hybrid cars grow in popularity,” said David Katz, president of Matrix Asset Advisors, a New York-based investment company.
Over the past six years, the proportion of US oil and gas company shares in terms of value in the S&P 500 has declined from 8.7% to 4.6%. “Whenever they start drilling, billions go into the pipe. It's no wonder shale stocks are falling,” comments Steve Schlotterbeck, former CEO of EQT, the largest producer of natural gas.
In the context of a global glut, which is putting pressure on prices, shale is constantly losing money – it stays afloat only from the sale of assets and new borrowing.
For decades, the United States has dreamed of independence from foreign oil producers. This goal was achieved: oil companies are producing record volumes of crude oil and natural gas, and have taken the lead among exporters. However, as The New York Times notes, the price paid for it turns out to be too high.