Publications: Notes at the Margin

No Place for Shale (March 30, 2020)


The US shale boom is over. US oil production should quickly decline by three or four million barrels per day as shale wells shut. There is no place for shale in the global oil market. Game over for 2020 and possibly forever.


The shale industry had a great run. However, its executives made every management mistake possible. Ultimately, though, it was the economic recession associated with the novel coronavirus, not managerial miscues, that killed shale. Shale crudes produce large volumes of gasoline and jet fuel but much smaller amounts of diesel fuel. There is no market today for jet fuel or gasoline, while the diesel market is expanding. Shale production must be shut in to make room for crude oils that produce little gasoline or jet fuel but can be manipulated to produce large volumes of diesel fuel.


The incompatibility of shale with today’s product supply/demand conditions likely makes efforts to sustain shale output by coercing cooperation from Middle Eastern producers counterproductive. Diesel fuel is in demand. Even greater amounts could be needed to maintain the global economy. Gasoline will not be required.


The supply/demand situation is temporary. The global economy will come back along with jet fuel and gasoline demand. Shale production will likely remain depressed, however, unless the industry drastically changes its model. As noted below, the shale production costs make the industry's recovery difficult. That difficulty is compounded by the exorbitant salaries paid to shale executives, compensation that is inconsistent with a low-margin industry. As we have explained in previous issues of Notes at the Margin and repeat below, the process of developing and producing shale is more like farming than traditional oil production. Accordingly, remunerations for those in the shale industry should be similar to those earned by farmers, not traditional oil executives. This would require pay cuts of fifty or one-hundredfold.


Without such changes, the shale business is probably dead.


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