The Economics of Shale Trounces Conventional Oil

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The Economics of Shale Trounces Conventional Oil

Contrary to what “the Greens” would have you believe, fossil fuels will dominate the economy through at least mid-century; that includes meeting 80% or more of U.S. demand in 2040.  So, while electric cars may become commonplace, the electricity will be generated primarily by coal, oil and natural gas.  Advanced nuclear fission and fusion will dominate carbon-free electricity production by 2100, but wind, water and solar will never be cost-effective.  It’s as simple as that.

Until about a decade ago, conventional oil and gas, largely from the Middle East and Russia, reigned supreme.  However, U.S. shale oil production has recently soared.  And today, it represents over half of all the petroleum produced in the United States. This surging supply in the hands of the world’s biggest energy consumer has created a de facto energy glut taking prices from over $100 a barrel in 2014 to under $30 in 2016 and keeping them in a narrow range ever since.

Seeing this industry evolution in action, nay-sayers argue that this is simply not sustainable.  OPEC energy ministers tied to conventional oil economics insist that shale is merely a temporary phenomenon.  Meanwhile “Greens” who think wind, water and solar are the only ways to go, believe that shale is a Ponzi scheme, which will soon be exposed.

However, neither of these vested interests understand the unique economic factors at play in this part of the industry.  Fortunately, after a rocky start over a decade ago by relatively small players, shale oil and gas is finally being embraced by some of the biggest energy companies like Exxon Mobile, Chevron, and Conoco-Philips.

As energy expert Simon Lack explains, “the short-cycle economics of shale energy projects” explains why recent deals like Chevron’s $33 billion acquisition of Anadarko, make sense.  Specifically, having a faster capital cycle boosts returns.

Consider the facts.

Conventional oil and gas projects used to require many billions of dollars in upfront capital, with a payback over a decade or more.  Global GDP growth, production costs and future demand all had to be carefully considered before this kind of investment decision could be made.  That’s a scary situation when climate change worries and other public policy responses have added to the long-term uncertainty associated with an already cyclical business...

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