Publications: Notes at the Margin

Fracking Comeback (December 7, 2020)

 

The US fracking industry, like a cat, looks to have nine lives. And like a stealthy feline being pursued by a larger, hungry animal, it is cleverly disguising its tracks. Recently, Scott Sheffield, CEO of Pioneer Resources, one of the industry's largest independent producers, suggested in interviews that increased production from US fields would be modest in 2021 and 2022. At the same time, he called on OPEC to maintain its production cuts.

 

There seems to be a method to Sheffield's statements. First, he dissembles regarding US output. US production will surge next year at these prices. Second, the increase will only occur if prices remain at or above current levels. Thus, he needs to conceal the coming boost in shale from OPEC to facilitate the US industry's resurgence.

 

The US Energy Information Administration is assisting Sheffield in his "coverup" by failing to report US oil production data accurately. For example, our accurate estimates of US output put end-November 2020 production at 12.4 million barrels per day, while the EIA reports it at eleven million barrels per day. One might say EIA officials are deliberately underestimating the rise in US production to boost prices and facilitate hedging by US producers, thereby helping to strengthen and perpetuate the industry.

 

Meanwhile, Wright's law has come into play. Bloomberg columnist David Fickling recently called attention to Wright's law in connection with rapid advancements in reducing renewables production costs. Wright's so-called law stems from research by aeronautical engineer T. P. Wright, who reported that the cost of making airplanes declines by fifty percent with every doubling of output.

 

In the twentieth and early twenty-first centuries, the technology used to develop oil and gas resources made Wright's law seem inapplicable. The introduction of fracking, though, has brought it into play. Wright's law now promises profits to US producers and threatens traditional oil producers. Sheffield likely understands this but has no incentive to tell OPEC.

 

Oil-exporting countries have been fooled. Their agreement to limit output increases to support oil prices has laid the foundation for a renewed boost in US production. Once again, OPEC and other oil-exporting nations have wasted the gains of a price war.