A Bust For The Ages

A Bust For The Ages

Executive Summary

  • In short, we’ve been lied to about the production potential of America’s shale wells
  • Huge decisions have been made based on the (faulty) assumptions we’ve swallowed
  • When it’s finally clear than much less is going to be available (and at a higher price) all hell will break loose
  • The choices we make right now will determine how bad the reckoning will be

If you have not yet read Part 1: The Shale Oil ‘Revolution’ Actually Reflects a Nation in Decline, available free to all readers, please click here to read it first.

The reason I keep bringing us all back around to the energy situation is because it’s so critical to, well… Everything

To make good decisions, you have to be armed with good information.  That’s not easy to find these days, especially in the US where we are saddled with a massive propaganda campaign when it comes to energy.

It’s aim seems to be to convince everyone that there’s nothing to worry about. It’s a near-constant barrage of these sorts of talking points and ideas:

  • The US is the new Saudi Arabia
  • The US is hitting new production records each month
  • The US is now a net exporter of oil for the first time in 75 years
  • Technology has improved so much that shale wells can now break even at $40/bbl oil prices.

And so on.

The problem with this sort of messaging is that the statements all need a couple of giant asterisks next to them, with some heavy explaining attached to add critical missing context.  They’re misleading, at best. And collectively inaccurate.

If you buy into these stories, you’ll probably make the wrong choices.  When, not if, but when the US enters the next phase of the oil story, it will all be over.  There aren’t any new source rocks to go after. 

I think we’re just a few years away from that decline phase, which means we don’t have a lot of time to prepare for what is certain to be an ugly period of adjustment. 

As I wrote in Part I, the WSJ has finally managed to run some basic numbers and discover that the shale story has been over-hyped by the operators.  It’s quite a fascinating tale, one that we are quite familiar with at Peak Prosperity.

These companies committed quite a few frauds along the way, each of which contributed to over-estimating how much oil (referred to in the industry as the “EUR”) that would come out of an average well, which include:

  • Claiming much lower than observed rates of decline (5% vs ~15%)
  • Using a tiny cluster of highly prolific wells to represent the entire play
  • Excluding really crappy wells entirely from the calculations for the “average”
  • Using ridiculously long estimates of well life (50 years when there are already wells tapped out after 10 years in some cases)

These are way beyond simple analytical differences and amount to overt fraud.  Okay, fine, caveat emptor to the investors, right?

Well, the problem here is that the US generally, and major corporations as well as individuals specifically, have bought the story hook-line and sinker and made big, long-term decisions based on these frauds.  Ford dropped selling sedans in North America to focus on selling trucks and SUVs, the US government rolled back plans on fuel standards, and individuals bought pickup trucks and/or SUVs under the theory that gasoline would always be cheap.

At a minimum, you should not be invested in….

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