The Trouble With Shale

“Oil Independence” is one of those things that Americans really get fired up about. Makes sense – Americans love oil, and we definitely love independence – talk about a patriotic combination.

What’s not to love? A lot, actually, and it starts and ends with fucking shale.

Broadly speaking, the term “Oil Independent” refers a country that is a net exporter of oil products like crude oil and refined petroleum. The United States became a net exporter of refined oil products in 2011, and a net exporter of all oil products in 2019 – an accomplishment facilitated by the lifting of a 40 year ban on crude oil exports that was lifted in 2015.

All of this was possible thanks to sweet, sweet shale. You probably remember hearing all about shale during the early 2010s – a period now referred to as the Shale Boom. Shale, it turns out, can be blasted and pumped (AKA fracked) to extract gas, or cooked at super-high temperatures to produce vapors that condense into oil.

Of course, getting at that precious oil and gas is a pricey process, and much more expensive than extracting from more conventional sources of crude oil. Fortunately for aspiring Shale-Lords in the early 2010s, low interest rates and quantitative easing had flushed all the banks with cheap cash. Cheap cash translates to easy loans, and ultimately this meant that the so-called Shale Boom was financed almost entirely with debt.

Which is not necessarily a bad thing… so long as you are profitable. Unfortunately for those Shale-Lords, profits from shale products are notoriously fickle. Turns out massively increasing the supply of something (in this case, oil and natural gas) drives down the price! Who knew?

But wait, it gets better! Shale deposits deplete pretty fast – much faster than conventional oil and gas wells – which means that firms involved in shale extraction are constantly having to explore and develop new sources, dramatically adding to the already absurd cost of the process. In economic terms, this means that firms in the shale industry are perpetually trapped in the short run – they must constantly account for the fixed costs associated with developing new capital.

Not a great look for profitability. When you factor these extremely basic economic concepts into the equation, suddenly getting into the industry [should] look like a much riskier proposition. In fact, the costs associated with shale extraction are so high that even huge spikes in oil and natural gas prices are often not enough to generate positive cash flows for these firms.

Not to mention that this all ignores another enormous cost associated with shale extraction – the numerous negative externalities. Fracking, you might have heard, is horrific for the environment, especially for fresh water tables. It has also been linked to earthquakes. Mining in general causes tremendous damage, whether you are bulldozing over sacred Native American lands or a beloved National Park, something the shale industry is quite familiar with. Shale extraction has proven to be hugely unpopular with the public, and often incurs heavy legal expenses as states like New York ban the practices.

One might think these conditions would give aspiring Shale-Lords pause. Instead, thanks to the aforementioned cheap money flooding the post-crash market, the shale industry exploded over the past decade, enormous risks be damned. Besides, who cares about risk when Uncle Sam has got your back with some of that sweet corporate welfare? The free market can suck it.

The Shale Boom did contribute a good chunk to our GDP growth over the past decade, and it did contribute to lower prices for consumers at the pump. But these gains came at a heavy price – the creation of a fossil fuel industry that is not only unprofitable, but also also constructed almost entirely out of debt – in other words, a Bubble.

Sound familiar? The threat of mass defaults in the shale industry has already rattled the banks, who apparently never bothered to assess the risk matrix associated with this industry back when their loans were helping to build it. Whoops!

For those dialed into the situation, the question was never if the shale industry would collapse, but when. With oil prices plummeting due to a combination of the coronavirus and the OPEC price war, said collapse now appears to be imminent. Such an implosion would likely wipe out a considerable number of jobs while sending massive shockwaves through the economy, possibly resulting in a recession.

All of this bullshit was made possible by America and our stupid thirst for “Oil Independence,” which is really just a marketing campaign whipped up by the fossil fuel industry to make us feel good about obliterating the environment. Instead of investing in renewables – which we know are profitable – our government encouraged the creation of the sham industry know as shale, no doubt at the behest of lobbyists from power players like Exxon and Chevron.

But hey, fear not Shale-Lords. In addition to the numerous subsidies your industry already receives (paid for by our tax dollars), the Washington Post reported yesterday that Trump is pushing for a bailout of the sector, once again proving that the risks of engaging in the Free Market only apply to normal people and not to beloved industries like fossil fuels and banking.

I guess keeping shale oil solvent in spite of their ludicrously reckless business model is more important than healthcare, student loan relief, or investing in education. Oh well, what’s another massive government bailout of a negligent industry that would otherwise be destroyed by the Free Market? In fact, I think there is a word for that.