The shale energy revolution recently (and for most commentators, unexpectedly) conquered the world; so, it is truly shocking today to be writing about the prospects for its survival. Nevertheless, following on from the Covid\u00ad19 crisis \u2013 the political risk event of a generation \u2013 and the energy industry\u2019s own suicidal civil war, the question is entirely reasonable. I have attended endless energy conferences over the past decade about \u201cthe next big thing,\u201d and it has always greatly amused me to see the shale revolution given short shrift: in truth, it was the only \u201cbig thing\u201d actually happening to the industry in the real world. For unlike the other glittering, if hypothetical, possibilities, the shale revolution was real: indeed, it completely disrupted the old energy market, previously dominated by opec\/Saudi Arabia and, to a lesser extent, Russia.<\/p>\n
Hydraulic fracturing, or \u201cfracking\u201d \u2013 the process of injecting liquids at high pressure into subterranean rocks, widening existing fissures, and extracting vast amounts of oil and natural gas \u2013 has been an undeniable game\u00adchanger. It has transformed the United States \u2013 by far its leading exponent \u2013 from a long-term energy mendicant into the largest producer of oil in the world, in the blink of a historical eye.<\/p>\n
Crude oil production in the US more than doubled from 5.5 million barrels per day (bpd) in 2010 to 12.2 million bpd in 2019. The American percentage of the combined market share of global oil products came to amount to fully 19% of the overall total, compared to Saudi Arabia\u2019s 12% and Russia\u2019s 11%. Last year, the state of Texas alone produced 5 million bpd of crude, accounting for 40% of the US total, which put the state\u2019s production above that of the country of Iraq (4.7 million bpd). By September 2019, the US became a net exporter of crude and petroleum products for the first time since 1973. These figures make it overwhelmingly clear that the world has experienced nothing short of an energy revolution.<\/p>\n
But just as startlingly as the shale revolution burst upon the geopolitical scene in the 2010s, this past year has seen utterly unforeseen existential dangers arise to challenge its perch atop the energy markets.<\/p>\n
Even before the pandemic crisis hit, there was a global oversupply roiling the oil markets, as the three energy superpowers (US, Russia, Saudi Arabia) jockeyed for command, leading to a precipitous fall in price.<\/p><\/blockquote>\n
The West Texas Intermediate (wti) price (the benchmark for US crude) tumbled from $106 a barrel in June 2014 to a paltry $32 a barrel in January 2016. Then came the double whammy of the pandemic, which decimated global demand, and the oil price war, which led to over\u00adsupply at the worst possible time.<\/p>\n
It is the self-inflicted global depression in the making \u2013 the world\u2019s desperate attempt to forestall a global pandemic on the scale of the Spanish Flu of 1918\u00ad-1920 (which killed an estimated 50 million people) \u2013 that has most indelibly harmed shale, as demand has cratered. Global oil demand collapsed by an astounding 29 million bpd year on year in April 2020. It is unsurprising that the price of wti crude fell off the map, dropping from $51 bpd in January 2020 to $20 by March.<\/p>\n
The oil crisis reached its nadir on April 20, 2020, known in the trade as \u201cBlack Monday\u201d. Fears about a lack of storage capacity and about credit running out led the price of wti to fall to an incredible negative $40 a barrel. This meant that American producers briefly had to pay traders to take oil off their hands, an unheard of situation.<\/p>\n
To meet their always dicey financial obligations, shale operators were forced to cut production and close rigs. Only 185 rigs were active in the US this July, massively down from 683 in March. Worryingly, even the stabilization of the wti price at around $40 a barrel by June failed to entice many of the dormant rigs to go back online; the break\u00adeven price of shale \u2013 even allowing for its constant technological innovation over the past decade \u2013 remains around 50\u00ad55 dollars per barrel.<\/p>\n
The obvious result is that layoffs have ravaged the industry. Approximately 100,000 jobs \u2013 fully 20% of the total in the oil and gas sector \u2013 have been lost in the US since February 2020. More than twenty shale producers have gone under, and oilfield service workers and drilling crews are out of work. What\u2019s more, when the price of oil nestles around $35 a barrel, it is estimated that 30% of all major US shale producers are technically insolvent. This means that they are not able to cover their liabilities with the promise of future cash flows. So, even after price stabilization, the viability of the entire shale industry sits precariously on the edge of a precipice.<\/p>\n
The oil war<\/h2>\n
At this worst of all possible moments, the Saudis and the Russians launched a full-scale oil war. This made a terrible situation for the energy market downright catastrophic, as extra production flooded the already saturated market with new and utterly unnecessary supply.<\/p>\n
Russia joined opec\u00ad-plus in 2016, specifically to protect the overall global price of crude from the supply shock created by the shale revolution. However, over the next four years, to the frustration of Vladimir Putin, the production cuts put in place by opec\u00ad-plus, while stabilizing the price, did not stop US shale from gaining an ever greater energy market share. Unhappy with the results of opec\u00ad-plus, the Kremlin decided to bolt from the pact.<\/p>\n
On March 8, 2020, in frustrated response to Russia abrogating its unofficial alliance with opec and reneging on its promise to refrain from over pumping so as to keep prices higher, the Saudis abruptly shifted gears. Riyadh, the only major oil power capable of significantly ramping up production at will, vowed to increase its oil flow by 2 million bpd by April, in an effort to punish a recalcitrant Moscow with cratering prices.<\/p>\n
Shale was caught in the oil war\u2019s crossfire. Just one day later, on March 9, the price of wti crude collapsed by fully 25%, falling from $41 to $31 a barrel, the single largest drop in one day since 1991. In the end, the Saudis more than kept their word, increasing their oil production from 7.4 million bpd in March to 10.3 million bpd in April, an increase of almost 3 million bpd. Beyond chastising Russia for leaving the opec\u00ad-plus alliance, Riyadh \u2013 once it saw the suffering it was causing the shale industry \u2013 hoped to recapture some of its lost global energy market share, which had been steadily eroding over the past decade.<\/p>\n
But the Saudis forgot a basic lesson of the energy market: it is driven as much by geopolitics as it is by macroeconomics. Under intense pressure from his political base to save the shale industry, Donald Trump bluntly re\u00adminded the Saudis of their longstanding alliance with the US, and that the decimation of the shale industry would call these primary ties into question. Pushed into a room by Trump, Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin quickly reached an agreement, resurrecting the opec-\u00adplus alliance. This satisfied the Saudis while also saving the shale industry, Trump\u2019s great imperative. opec\u00ad-plus agreed to an overall cut of 9.7 million bpd on April 9, which took fully 10% of global oil off the market, thereby stabilizing prices.<\/p>\n
\nPresident #Putin<\/a> spoke with Crown Prince of #SaudiArabia<\/a> Mohammed bin Salman Al Saud: Broad expansion of bilateral ties, implementation of #OPEC<\/a> Plus agreements, coordination aimed at maintaining stability in global #energy<\/a> market, situation in #Syria<\/a> and #PersianGulf<\/a> on agenda. pic.twitter.com\/z3dfSxcla7<\/a><\/p>\n
— Russian Embassy, UK (@RussianEmbassy) February 16, 2021<\/a><\/p><\/blockquote>\n