It doesn’t seem fair to pick on big media machines for cranking out low-grade stuff that panders to current fashion in an arms-flailing attempt at popularity. I’d do the same if I were ambitious. The tactic isn’t a big deal when the readership is fervently awaiting news about, for example, Taylor Swift’s new boyfriend, but when it comes to matters of energy – i.e., what feeds us, moves us, and keeps us warm – we should hope that mainstream news editors might apply some critical thinking before approving over the top flights of fancy. The evidence suggests not.
For instance, consider the current universal theme in the energy world – that shale oil’s status is all that matters to the global scene. As an example, check out a Bloomberg article that graced these very pages recently. It is the work of Mark Grant, a possibly witless Dallas commentator who writes a daily newsletter of market commentary. (Grant is, according to his firm’s website, “well known for his frequent television appearances where he discusses domestic and foreign market trends and the impact of socio-political change on market behaviour.” Obviously, being frequently on television, it’s highly implausible that he could be wrong but hear me out.
Perhaps the coffee isn’t strong enough this morning and I’m being harsh. You be the judge: “America has discovered the magic beanstalk and it is named ‘shale oil production.’ The U.S. now has the ability to not only be energy self-dependent but it can become a major exporter of oil and natural gas and spin the world on its axis…OPEC can’t quite believe it and the cartel is in denial. The markets can’t quite believe it, either, as OPEC spews the nonsense that we have listened to, and believed in, for far too long.”
I changed my mind; I’m not nearly cranky enough. This aggression will not stand. Again per the website, Mr. Grant provides a daily news letter providing “insights on economic trends, interest rates, equities, debt, and market strategies.” In other words, he knows nothing about oil and gas except pop culture idiotic idioms. This is however the sort of effluent one should expect from a “daily market commentator,” those that must explain the unexplainable.
Daily market movements are essentially random; minor price movements occur because there are slightly more buyers than sellers, or vice versa. Yet a daily market commentator will always come up with an explanation because they have to – they are incapable of looking into the camera and saying “I don’t know.” Blank daily newsletters are also awkward. Not that news can’t move markets; it’s just that on a daily basis cause and effect is often unclear. It is easy to spot these charlatans; on some days the market will move and the only possible explanation is that there is no possible explanation. But they never say that, because it fails to display the crushing superiority of their grasp of markets.
Anyway, back to the article’s boldly wrong assertions. The market does believe the bombastic shale hype; that is why futures prices are so flat for the next 5 years. The market even overlooks that the Middle East – still home to a third of world production – is an indescribable powderkeg of unstable everything, and the market yawns because shale oil will save the day. It’s like a Patriots fan saying they will never lose another football game because of how they finished last season.
Listen up, celebrity commentators. The “magic beans” of this birdbrained analogy cost over $500 billion (here and here); that’s not magic it’s something like $45,000 per flowing boe (5 million b/d and 40 bcf/d). The “magic beans” are the impulsive pillaging of what should be a national economic treasure and security blanket, with sweet spots being mauled for short term gain by 2+ mile lateral wells in the latest sad example of the tragedy of the commons. The “magic beans” do not, cannot, will not make the US simultaneously self sufficient and a major exporter of oil and gas; are not even remotely close to meeting the US’ needs. The sweet spots are being drilled up as we speak at a rate that even the dimmest of analysts would have to realize doesn’t last forever. The “magic beans” were developed by cash hungry producers who’ve saddled these resources with ridiculous fixed transportation charges through the miracle of Master Limited Partnerships that pay fat dividends forever and will ride these plays into the ground like a 400-pound jockey. And finally, OPEC is not a ship of fools. Saudi Arabia understands global markets better than anyone, and even technically it displays a mastery of reservoir management that shale producers will never comprehend – as evidenced by the current drainage-race free-for-all.
Here’s one last reference point that can’t coexist with Grant’s heartbreakingly daft analysis. At about the same time that Grant’s postulation appeared, the International Energy Agency released its global consumption forecast for next year, which was comprehensively ignored by the media. Next year, global consumption is expected to be approximately 100 million b/d. Consider that number in the context of global declines and US shale production.
In late 2012, well into the shale development boom, the world consumed about 90 million b/d. If next year’s forecast is correct, consumption will have risen by 10 million b/d in 6 years. Over those 6 years, natural declines of say 3 percent will have removed 15 million b/d from production. In combination, from 2012 to 2018, 25 million b/d needs to be added to keep up with consumption.
The entire shale revolution added one fifth of that. If shale production doubled to 10 million b/d, which would be a remarkable feat, it would equate to only two fifths of the required amount. Yes, there is a temporary glut and yes, the quick rise of shale production helped cause it (though $100/bbl oil added a lot of production from everywhere). Shale oil is a big, important resource that developed rapidly; but that simply can’t be extrapolated into global dominance.
There are several reasons why this narrative is almost unchallenged. It is propagated by short-term focused E&P companies in their IR presentations, with fervently enthusiastic scenarios that illustrate their single-handed ability to flood the world with product. Each and every one of them can do this, apparently. Secondly, it is propagated by the US government itself, which has an incomprehensibly large need for low oil and natural gas prices. The US economy was saved from armageddon in 2008 by trillions of debt, and the only hope the government has of even beginning to dent the pile is through significant economic growth. High oil prices are not welcome.
Those are very powerful agents of propaganda. It’s no wonder then that “daily market commentators” simply grab the messages without applying critical thinking; Jim Cramer has made a career out of that simply by shouting. Going with the consensus is the only logical thing to do, for such media pets. For the rest of us it is wiser to be a bit more inquisitive.
Read more insightful analysis from Terry Etam here