Shale Oil, revolution or scam?

Nobody seems to be surprised that large scale shale oil and gas exploitation began from 2008 – 2009 onwards, at the precise moment when the US, embroiled in the crisis and with sluggish consumption, and having the least need, when the price of oil suffered its biggest drop to trade around $40 a barrel (the price of gas also having suffered a similar fall at the time).


Chart 1 – left, US shale oil production, 2000-2024 (EIA forecast after 2013). Right, price of a barrel of WTI crude, 2002-2012. Sources : Bloomberg/EIA/AXA, Repsol

It certainly isn’t technological development that has caused this craze, since fracking has been known and used since 1947, whilst horizontal drilling was developed in the 70s. Neither do high prices explain this takeoff, since the breakeven price for shale oil profitability is around $75-$80 a barrel, a price barely exceeded for a year before 2009 (then only surpassed long-term from 2011). Therefore, the drive is coming from elsewhere.


Chart 2 – US oil consumption (blue), production (red) and imports (green), 1970-2012. Source : FRBSF.

What has been promised to the oil companies who have thrown themselves into shale oil, in a full economic crisis that depresses oil prices, whilst the latter must remain high to ensure the project’s profitability? Has no one seen the dangers, or the weak prospects? We doubt it. The wells are being depleted at enormous speed: in just two years their production has fallen fivefold.

Chart 3
 – Type production for a shale oil well (barrels per day according to the number of months in production). Source : J. David Hughes.

To ensure a total rising production, more wells are always needed therefore, and at an alarming rate (currently 1500 new wells a year in the Bakken Formation).

chart4Chart 4 – Bakken production (black) and that the number of wells (brown), based on two scenarios: 1500 new wells a year (current rate solid lines), or 2000 wells a year (dotted lines). Source : J. David Hughes.

One should certainly be surprised that all these oil companies have launched themselves body and soul into this adventure, carelessly despite a more than doubtful profitability, now seeing them in difficulty[1], and hearing estimates of available reserves slashed very year. Even on Wall Street some, and not a few, think that the party is over[2]. In May, the reserves of the largest US shale oil field were officially revised downwards by 96%…[3] going from the equivalent of two years US consumption to just one month. An official Washington report, dated December 2013, even forecasts that the country’s production peak will be reached in 2016, at 9.5 million barrels a day[4], far from the current consumption of 18.9 million barrels a day. US energy independence doesn’t seem to be for tomorrow.

The suspicion over shale oil will occupy the thoughts of our readers especially as….. the estimates of world shale gas/oil reserves are largely made by… the US. Just seeing the references mentioned in all the articles on the subject: in Poland the numbers come from US statistics[5] ; it was the US who revised French reserves downwards by 24% in June 2013[6] ; etc.

All the numbers, or almost all, on Wikipedia are American. The most complete report on world reserves is American[7]… In this case is the “wish” of many governments’ to exploit their basement completely free?

 Finally, since the 1970s the US has prohibited the export of their oil: this means that all their shale oil production remains fully in the US. If the shale oil boom was of the scale touted by the media, why is it that the price of US oil (WTI) didn’t collapse long ago?

In summary, the official line of a “revolution” seems very hard to believe… And if it is a scam, then one must understand who benefits… Subscribe to the GEAB to read the rest of the article


[1]     Compare above.

[2]     Source : Bloomberg, 03/09/2014.

[3]     Source : Los Angeles Times, 20/05/2014.

[4]     Source : Houston Chronicle, 16/12/2013.

[5]     Source : Reuters, 31/07/2014.

[6]     Source : La Tribune, 11/06/2013.

[7]     Source : EIA, 10/06/2013.