The US shale oil industry is comparable to Silicon Valley start-ups. That is, profit is irrelevant, it is all about growth. Thus, provided shale oil production continues to grow, it is thought Wall Street will continue to provide debt funding.

The industry has lost money, regardless of whether the oil price $90 or $30 a barrel. In fact, the breakeven point for the larger producers has tracked the WTI spot price since 2014. The reason is that the sector is heavily dependent upon services. Thus, as the oil price drops, less wells are drilled and service companies lower prices to retain at least some business. Conversely, when oil prices rise, more wells get drilled and costs rise.

The 60 biggest US shale oil companies have lost around $180 billion over the past five years. Current debt stands at around $200 billion. There is no way the industry can grow without further debt, but even with further debt the industry will still not show a profit. The rhetorical question is, what happens when the lending dries up….

Another odd aspect of the “shale revolution”, is that politicians seem to think that the US is heading to energy self-sufficiency through increasing the supply of shale oil and gas. Well the country currently imports around 5 million barrels of oil per day. That is about the same as that produced from shale. So, shale production would have to double, presumably funded by giant amounts of debt, just to meet current demand. Good luck with that.

09 September 2017 Commodities 37 Comments