"But it (shale) was something to do, at least, if you were
an oil company — an alternative to 1) doing no business at all, or 2) getting
into some other line-of-work, like making yoga pants or gluten-free
cupcakes."
The author is a prominent American social
critic, blogger, and podcaster, and we carry his articles regularly on RI. His
writing on Russia-gate has been highly entertaining.
He is one of the better-known thinkers The New
Yorker has dubbed 'The Dystopians' in an excellent 2009 profile,
along with the brilliant Dmitry Orlov, another regular contributor to RI (archive). These
theorists believe that modern society is headed for a jarring and painful
crack-up.
You can find his popular fiction and novels on this subject,
here. To get a sense of how entertaining he is, watch this 2004 TED talk about
the cruel misery of American urban design - it is one of the most-viewed on
TED.
If you like his work, please consider
supporting him on Patreon.
Editor's note: Kunstler is an expert on the shale
question, which is central to his theory that the gradual drying up of
hydrocarbon energy around the world is going to lead to inexorable economic and
social upheaval.
It is great to have someone writing about this in a way that not
only doesn't make ones eyes glaze over, but is actually fun and entertaining.
Shale is also central to Russia's fortunes. The Russians
invented fracking in the 70s and never implemented the technology because it is
not profitable. They have been very dismissive of it in recent years, arguing
that it is a short term phenomenon made possible with ultra-low interest rates
and is ultimately economically unsustainable, which coincides with
Kunstler's view.
Should the US shale industry get
ship-wrecked on the rocks of rising interest rates, global oil prices will
rocket to economy-busting highs again, albeit giving a temporary windfall to
low-cost producers like Russia, Iran, and Saudi Arabia.
As of this week, the shale oil miracle launched US oil
production above the 1970 previous-all-time record at just over ten million
barrels a day. Techno-rapturists are celebrating what seems to be a blindingly
bright new golden age of energy greatness. Independent oil analyst Art Berman,
who made the podcast rounds the last two weeks, put it in more
reality-accessible terms: “Shale is a retirement party for the oil industry.”
It was an impressive stunt and it had everything to do with the
reality-optional world of bizarro finance that emerged from the wreckage of the
2008 Great Financial Crisis. In fact, a look the chart below shows how exactly
the rise of shale oil production took off after that milestone year of the long
emergency. Around that time, US oil production had sunk below five million
barrels a day, and since we were burning through around twenty million barrels
a day, the rest had to be imported.
In June of 2008, US crude hit $144-a-barrel, a figure so harsh
that it crippled economic activity — since just about everything we do depends
on oil for making, enabling, and transporting stuff. The price and supply of
oil became so problematic after the year 2000 that the US had to desperately
engineer a work-around to keep this hyper-complex society operating. The
“solution” was debt. If you can’t afford to run your society, then try
borrowing from the future to keep your mojo working.
The shale oil industry was a prime
beneficiary of this new hyper-debt regime. The orgy of borrowing was primed by
Federal Reserve “creation” of trillions of dollars of “capital” out of thin air
(QE: Quantitative Easing), along with supernaturally low interest rates on the
borrowed money (ZIRP: Zero Interest Rate Policy). The oil companies were
desperate in 2008. They were, after all, in the business of producing… oil!
(Duh….) — even if a giant company like BP pretended for a while that its
initials stood for “Beyond Petroleum.”
The discovery of new oil had been heading down remorselessly for
decades, to the point that the world was fatally short of replacing the oil it
used every year with new supply. The last significant big fields — Alaska, the
North Sea, and Siberia — had been discovered in the 1960s and we knew for sure
that the first two were well past their peaks in the early 2000s.
By 2005, most of the theoretically producible new oil was in
places that were difficult and ultra-expensive to drill in: deep water, for
instance, where you need a giant platform costing hundreds of millions of
dollars, not to mention armies of highly skilled (highly paid) technicians,
plus helicopters to service the rigs. The financial risk (for instance, of
drilling a “dry hole”) was matched by the environmental risk of a blowout,
which is exactly what happened to BP’s 2010 Deepwater Horizon platform in the
Gulf of Mexico, with costs estimated at $61 billion.
Technology — that El Dorado of the Mind — rode to the rescue
with horizontal drilling and fracturing of ”tight” oil-bearing shale rock. It
was tight because of low permeability, meaning the oil didn’t flow through it
the way it flowed through normal oil-bearing rocks like sandstone. You had to
sink a pipe down, angle it horizontally into a strata of shale only a few
meters thick, and then blast it apart with water under pressure and particles
of sand or ceramic called propants, the job of which was to hold
open those fractures so the oil could be sucked out. Well, it worked. The only
problem was you couldn’t make any money doing it.
The shale oil companies could get plenty of cash-flow going, but
it all went to servicing their bonds or other “innovative” financing schemes,
and for many of the companies the cash flow wasn’t even covering those costs.
It cost at least six million dollars for each shale well, and it was in the
nature of shale oil that the wells depleted so quickly that after Year Three
they were pretty much done. But it was something to do, at least, if you were
an oil company — an alternative to 1) doing no business at all, or 2) getting
into some other line-of-work, like making yoga pants or gluten-free cupcakes.
The two original big shale plays, the
Bakken in North Dakota and the Eagle Ford in south Texas, have now apparently
peaked and the baton has passed to the Permian Basin in west Texas. If the
first two bonanzas were characteristic of shale, we can look forward not very
far into the future when the Permian also craps out. There are only so many
“sweet spots” in these plays.
The unfortunate part of the story is that the shale oil miracle
only made this country more delusional at a moment in history when we really
can’t afford to believe in fairy tales. The financial world is just now
entering a long overdue crack-up due to the accumulating unreality induced by
Federal Reserve interventions and machinations in markets.
As it continues to get unglued — with rising interest rates
especially — we will begin to see the collapse of the bonding and
financing arrangements that the fundamentally unprofitable shale “miracle” has
been based on. And then you will see the end of the shale “miracle.” It is likely
to happen very quickly. It was fun while it lasted. Now comes the hard part:
getting through this without the nation completely losing its marbles and doing
something stupid and desperate — like starting another merry little war.
