Midland is the capital of the Permian oil region. Everything in Midland is about oil and about money. The main tourist attraction is a petroleum mussoon in front of the petroleum Club in the town.
You have this massive display.
They say, let's make oil great again, mogag and the also the display goes on, they say today is a great day to drill for oil.
That's Hoavier Blast. He's a columnist for Bloomberg Opinion and he reports on the oil industry for years. Javier has traveled to the region of West Texas that's an epicenter of the shell oil drilling bonanza that has powered the US economy, shaken up global energy markets, and shaped geopolitics for more than a decade.
And I was talking to executives and said, well, is it really a great day to drill for oil? Because you are not really nearly as much as you used to.
Now the beginning of the end is within sight and Wall Street is demanding its share of the bounty before it's over.
And that kind of really tailwind that the shale revolution has been for the US economy and US politics is not going to be there.
I'm Westkasova today on the big take what if anything can replace the great American oil boom? Jabier, Can you start by telling us why the Shell Revolution in the US turned out to be such a transformative thing.
For about twenty years, we thought that US oil production was on a secular decline, that the US was going to produce less and less every year, and that it was going to rely on the international market, and that means really buying more from places like Saudi Arabia and this Willa and.
Opeg more and more.
And then when the Shell Revolution started about twenty years ago, that was really throwaway and completely reversed. The US production started to increase every year. The US was pumping more oil. When you put all in total, the US was producing about eight million bars a day and today is producing about twenty million bars a day. The US went from being energy poor to be so rich that it can esport his energy overseas. It was just a once in a several generations transformation.
And all of that oil production had an enormous effect too. And oil prices both in the US in a global oil market, well.
I would say that three things happened thanks to the Shell Revolution. The first one is that oil prices were lower than otherwise. We don't have a counterfactual to say, oh, well, oil prices without share would have been twenty or thirty or fifty percent higher. But we know that the shelled Revolution adds a lot of supply into the market and that kept prices lower than otherwise. For the US economy was also a massive boom. It was a lot of
investment going into Texas, New Mexico, Dakota, Oklahoma. It was highly intensive on capital but also highly intensive on manpower. All the sudden unemployment in the oil path went to record lows.
It was just full employment.
Workers from outside those states were flowing into Texas for jobs. Driving a track in West Texas was paying one hundred and fifty one hundred and seventy thousand dollars a year. And also it changed politics the US. All the southern
have a stronger hand on global geopolitics. The White House all the way from the seventies have been always constrained on what it could do against oil countries because it was was fearful that prices will go through the roof Casoline prices is a price that every Americans see every day, and it can't really topple a government or lose an election. All of a sudden, Shale changed that, and the White House for the first time could go and say to Venezuela,
we are going to imposetions on you. Say to Russia, We're going to impose antions on you. Say to Iran, either you negotiate with US a nuclear deal, or we are going to go and restrict the way that you can esport oil. And that have never happened in US politics for at least thirty forty years.
And also in that mix, of course, is Saudi Arabia and the other OPEK producing nations.
The US all of a sudden became a rival to Saudi Arabia and OPEK. It was like the US for the first time has the same force. They were equal in this kind of battle for the control of the oil market, to the point that OPEK launched a price war against the shale producers if float the market in twenty fourteen fifteen, trying to drive prices down to a level that will bank rap the US shale industry.
OPAK refused to yield its production to shale rivals, and the collapse in oil prices is having a ripple effect across global markets. The decision in Vienna sent crude features to four year lows and shave ten percent of the price of oil this week. At these levels, some shale producers could lose money, and that.
Was really a realization by Opek that they have lost control of the market, that they needed to go nuclear. They really went all in to try to regain control of the market, tried to bank rap the industry because this competitor was too strong for Opek.
And that did not work.
It didn't work.
Because yes, a lot of companies went into bankruptcy, prices collapse. Dust drilling also fell sharply, but the companies that emerged from that became leaner, fitter, faster, and very soon Opek found that shale auction was booming again, that the US was sporting oil overseas, and that the market.
Was flooded with oil.
And that's the reason that from an average of around one hundred dollars for a few years from twenty ten to around twenty and fourteen, oil prices in the following five years average about half of that.
For listeners who might not be as familiar with what shale drilling is, can you explain why it was a revolutionary and how it's different from traditional oil drilling.
Put it in very simple terms.
Traditional oil drilling, you drill a vertical pipeline a hole in the ground, and you go vertical down and you are aiming to heat a spot that is basically under your feet. What shale formations look like is more like
a tiamizou cake. There are many malli layers of productive strata with oil, but they are very compressed and the rock is non porous, so to reach them you have to go vertical, and then you need to turn around and go horizontal underground for a very long length and then blast the rock with water, sand and chemicals to fracture that rock and to get the oil flowing. That's what we call fracking. And drilling that way was unthinkable about thirty years ago. Even at the very early days
of the Shelle Revolution. The industry as a whole was deeply sceptical that this was gonna work. And you know, we all were skeptical. So I remember hearing about this about fifteen years ago, and I was thinking, So, they're gonna drill a hole vertically, and they're gonna go horizontal for about fifteen thousand feet and they're gonna blast it and they're gonna get the oil getting out of the ground, and this is gonna work. And I was like, oh god,
that is really very difficult. I don't see how this is gonna work. Oh boy, how wrong I was. Many people in the industry were a slow realized the potential. But it was a bunch of Maverick oil executives whould really try these first. It was not big Oil, This was not Trevron or Exomobile. This was a bunch of people in places like North Dakota and West Texas who pioneered this technique.
And the thing that made it such a big deal was that just at a time when a lot of people were thinking that the US oil reserves are kind of largely tapped out, they were able to access these pockets of oil that beforehand would have been way too expensive to try to get into. It wouldn't have been.
Worth the cost.
You think about the Permian oil, which is this region in West Texas southeast New Mexico. Oil companies have been drilling there for about one hundred years. Indeed, twenty twenty three marks the one hundred anniversary of oil production. What we do think commercial oil production in the region. So people were thinking that the results were mostly exhausted, that the shale formations were too difficult technically to tap. And this new techniques, as I said, the horizontal drilling combined
with the fracking, is what really untapped the reserves. The oil was there, the oil was just waiting for someone to find a way to do it.
There is a catch here.
It is expensive to do and because of the nature of those reserves.
Oil production is a gusher for a.
Few days and then it comes down very very quickly, and that was what made shale different.
But also very complicated.
And you want another bars of production, you need to drill another well, and another well and another well. So the oil industry found itself and a bit of a thread meal and a thread meal that it was just running quite fast.
One of the things you write is that after these kind of innovative companies got in there and were able to pioneer this new way of drilling, then everybody wanted to get in on it.
Shale became the hotels area of the oil in the street. It attracted capital from Wallace Street packing. These pioneers, the early cowboys, but then everyone figured out this is the place to be so very quickly. Chevron have had properties in the Permian for many, many years, as long as seventy five years ago. They never sold the ackage, but they kept their achraage on their books, basically thinking that
their value was pretty much zero. And all of a sudden they were like, hold on second, we own lane alongside where these other guys are producing a lot.
We can't do that.
So Big Oil kind of figure out, well, let's join the revolution, and that's where Chevron started doing it, Conoco Philev started doing it, and then ultimately Exxon also arrived there and also joined the Shelle Revolution, to the point that you look at what Exon is doing today, the Permia and West Texas is really where they are drilling the most, and they're putting quale lots of their capital at play.
After the break, oil companies set growth aside to focus on making money for shareholders. However, before the break you were talking about one of the drawbacks of this show revolution was how much money it took to drill these wells, and that started causing a lot of tension between the companies and the investors in those companies.
To understand that tension, I went to Midland, Texas. That is a relatively small town population about one hundred thousand people, and that's actually where George Bush Senior settled and created his first oil business before many years later went into politics and finally became the President of the United States. And you can see it Midland. There is a desire to make money for an oil that's the problem. There is the pressure to make profit. This shale revolution was
fantastic for the United States as a whole. The economy benefited, but investors lost a lot of money. The companies needed to reinvest so much of their profits to keep up with that thread meal of drilling wells and drilling wells to increase production that at times, very early days, they were putting back into drilling fifty percent of their profits.
That went up to eighty percent, that went up to one hundred percent, and very soon they were borrowing money because they needed to reinvest one hundred and fifty percent of their profits to continue drilling. And for a few years, Waller Street was happy with that. It was similar to the technology industry. You put money early, you take the losses because.
You want to grow.
You are expected at some point you achieve a critical mass and then you don't need to grow that much and you can start making money.
But that never really happened with shale.
All the time, the companies needed to reinvest a lot of money and drill more and keep lossing money. So at some point Wall Street said enough is enough. It was held by the fact that oil prices collapsed during the pandemic, and then the industry went into a massive restructuring. Companies abandoned these targets of growing and growing and they focus on returning money to shareholders, and drilling has come down massively in West Texas and across the United States.
Prices for oil remained quite high by historical standards. It's still seventy to seventy five dollars a barrel, but drilling has come down significantly, and it's about half of what used to be at the peak of the revolution.
You have the striking line in one of the pieces you've written about this, and you called the shale boom the most profitable example of capital destruction the energy industry has ever seen.
I say that because I think it was very profitable for the United States as a whole. You think that consumers benefited because they enjoy lower gasoline prices and also lower gas prices the economy as a whole benefited by the increasing investment capital investment shale is a process that requires a lot of money to be spent on everything from chemicals to steal to manpowered et cetera, et cetera. And it was also great for the White House and American politics in the terms of giving the US a
very strong handing energy geopolitics. But it was capital destructions in the sense that Wallace Street lost a lot of money.
About for each dollar.
That investors put in shale, they recovered only fifty cents.
You also write that as wall Street started demanding profits that production was no longer going to satisfy them. The industry started to consolidate very rapidly.
We have seen quite a lot of mergers and acquisitions, and this goes back to the origins of shale. It was not the big oil companies, It was the smaller companies. It was the mavericks, a bit of the cowboys. The shale industry is full of great characters, CEOs who created their companies for nothing and then created these multi billion dollar oil companies. But that was good for the early days for a lot of experimentation, for a lot of losses, but for a lot of excitement and growth. When you
need to deliver return size matters, consolidation came. Companies needed synergies do more with less money, and we have seen a lot of emergency and acquisitions in the shale path. And also we have seen the big oil companies like XO Mobile have entered into the shale industry and have both others to very very quickly grow haer.
Has that worked.
Has the consolidation now given Wall Street what it wants? Are they able to now make money.
For the first time, We're beginning to see Wall Street making money from shale. It has helped obviously that oil prices were high last year. But we have seen is that companies are no longer reinvesting in the majority or even more than what they are making in profits into new production. Now that has come down and companies are aiming to reinvest something between thirty thirty five percent all
the way to fifty percent. But the other half of the money that they are making is being sent to shareholders, whether it's dividends or buy backs special dividends. But Wall Street is getting the money obviously, that has a price, and the price is that shale cannot growth production nearly as fast as it did. Don't get me wrong, shale production is still growing and probably it's going to grow for a few more years, but the rate of growth
has slowed down significantly. It is even slower that we will be expected at similar prices.
We're beginning to see even a.
More of a slow down trend in twenty twenty three that's going to go into twenty twenty four. And it was very interesting on my last trip to the Permian was how openly people in the industry that have for many years basically only talk about growth, we're talking for the first time that US oil production is gonna pick. There is no agreement when it's gonna happen, but everyone
now sees this peak looming in the horizon. I think that probably the consensus is in the industries that is gonna happen in the next three to five years, somewhere between twenty twenty six and twenty twenty eight. But US oil production that has been growing all the way since
two thousand and eight now may peak. And that is a huge change in the industry because also means that unless oil demand stops growing, if the US cannot growth anymore, we have to go somewhere else for oil, and that's gonna be where the US was back thirty years ago into the Saudi Aravian Opek hunts.
When we come back, why peak shell oil might actually be a problem for the transition to clean energy. You said that if the man for early and the US keeps growing and production and falls, we're going to need to go elsewhere for that oil. But what we're seeing now is a lot of talk about transitioning away from oil, and in fact some of that actually happening. And you write that the shell revolution bought the world time for that.
What do you mean by that, Well, you think about when the revolution started. It is around the time that Tesla was really starting to become the company.
That we now today.
They were not ready to mass market electric b because we didn't have yet the technology on batteries that we have today.
Tesla is best known for it's one hundred and nine thousand dollars all electric roadster. The company apparently wants to take advantage of investor interest in green technology and battery powered vehicles.
Back fifteen twenty years ago, we were still completely reliant on internal combustion engines of cars powered by gasoline and diesel.
We didn't have.
Really the option that we are beginning to see today that we can move into the electrification of transportation into electric vehicles, whether it's Test, Louder any other brand. And if we have not had shale and demand was increasing and the supply was a bit stuck, nan but we will have found ourselves and the global economy is with much higher prices, much higher inflation, we will have had an economic problem.
So in some ways shale gave the whole.
Economy a bit of time to get ready for a world where at some point in shale is not going to be there.
We talked a little bit earlier about geopolitics and oil, which is always front and center. Certainly with Russia's were in Ukraine, the politics around oil and using oil sort of as a weapon has come up, and so that is still very much a big part of this conversation.
It is and if you think about the sansiens that the G seven impost on Russia, crippling the ability of the Kremlin to sell his oil, and then the health that the United s that is provided to Europe sporting a lot of liquify natural gas that would have not been possible without shale. At the same time, there's also the limits of shale. Shale is not a magic pill
that solves every energy problem. It helps, but it doesn't really give you the magic solution that is going to make the US energy independent and Europe is not going to have to buy anything from Russia. It is a very large energy system, but it really helps increasing production and therefore giving the system more flexibility.
So if you look out into the future, which I know you always do, what do you see? What is your forecast for how this plays out?
There are two skulls of thoughts, and I'm going to tell you what the two are out there. And then where I said, there is a school of thought that says, well, this is not a problem. Shale grow slows down and ultimately picks in the next five years.
But so is oil demand.
Because of electrification, evs, electric veh course, we're going to start needing less and less oil.
So even if the.
US is not growing production, that's not a problem because oil demand is gonna stop growing also and it's gonna fall. The other school of thoughts says, well, actually oil demand growth is going to prove more sticky that people think, yes, we are going to start electrifying our big course. But if you think of all the oil that we use, only about our quarter is gasoline. A lot of the other oil is for things that they cannot be really
easily electrified. You struggle to electrify the big tracks that move in diesel, You struggle to electrify all the construction equipment, the petrochemical industry, aviation, et cetera, et cetera. And oil demand may continue growing beyond twenty twenty six to twenty seven, even all the way into the twenty thirties, and perhaps it stops growing, but it doesn't really fall very very quickly.
That's the second score of thought, and that is the more worrisome one, because that will mean that the US is going to have to go back to Soudia, United Arab EMI days and open countries.
I am more on the second one.
I'm a bit worried that the energy transition is not going at the base that we need both to fight climate change but also to avoid high prices later this decade and into the twenty and thirties.
And if that comes to pass, Americans who have not had to think about energy security in a long time certainly might have to. Do you think that that's something that we should all be worried about.
I think that we should be worried about because the US has had these kind of wake up moments all the sudden politically that they were really unexpected. No one really saw it coming, the oil crisis in the seventies and eighties, and when it came, it really basically became the major subject for some presidencies. I mean, Jimmy Carter presidency was a lot of it about oil prices and gasoline prices and dealing with the Middle East.
It's a problem that we will not be able to solve in the next few years, and it's likely to get progressively worse through the rest of the century. We must not be solf a short timid If we hope to have a world for our children and our grandchildren, we something must balance our demand for energy with our rapid and shrinking resources.
So the last few presidencies have it easy in some ways because they.
Have not to really worry about oil.
I mean, all of a sudden, the United States was sporting It was almost a problem of riches I mean Barack Obama if he could have gone back to the seventies and early eighties and telling Jimmy Carter oil is not the longer a problem. We are actually exporting oil everywhere and helping.
Europe et cetera, et cetera.
And I worry that perhaps come back in five years time, a president in the White House is going to have to worry again about oil in a major way, and that kind of really tail wind that the shale revolution has been for US economy and US politics is not going to be there.
So what is the answer from a policy perspective? If oil production is naturally going down, and if electrification and other forms of renewable energy aren't rising quickly enough, is there a policy solution that can bridge that gap.
The most obvious one is to reduce gasoline consumption as quickly as you can, So you can do that different ways. You can try to speed up production of electric vehicles, speed up the logistics of electric vehicles, because I think that a lot of people worry about where to charge those electric vehicles. You could tax gasoline and make it more prices so people use it less. But all of
those policies have a lot of handicaps. I'm not a politician, but I know that I will not win a single boat if I was running for office promising to increase taxes on gasoline significantly. So what I will say is, in some ways politicians have had it a bit easier the last few years thanks to shale that has kept prices.
Lower than otherwise. Doing the energy transition.
In a situation in which prices are going higher for gasoline and other refined products, it's going to be more difficult because people are going to blame the transition on those prices, even if it's not completely related.
And I fear.
That the public support for any transition may wane if prices go up.
Javier, thanks so much for coming on the show.
Thank you so much for having me.
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