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Saudi Arabia Underestimates US Shale

Call it a skeptical opinion of a chief rival or simply wishful thinking, but the Saudi Arabian energy minister is pouring cold water on the idea that American shale producers are about to embark on a significant rebound. The FT reports:

Khalid al Falih, speaking at the World Economic Forum in Davos, said that while US output has rebounded in recent months he did not believe the US could add 2-4m barrels a day to keep up with demand growth any time soon.

“What has been tapped recently is the most prolific areas,” Mr Falih said of the US shale industry. “As demand rises they will go to the more expensive, more difficult, less prolific areas in the shale and they will find that they need higher prices.”

Al-Falih is correct in his statement that U.S. producers are going to target the cheapest, most productive shale formations first, and eventually be forced to tap the more expensive options—that’s just how this business works. But just as the geology will get more challenging over time, so too will the technology underpinning these projects improve. Future predictions based on the technological capabilities of the present are rarely accurate, but it seems that the Saudi minister is falling into that trap here.

We’ve already seen that very mistake made by market analysts observing these very same producers two years ago when they assumed that sub-$75 crude would sink the upstart shale industry. That kind of thinking was wrong then, and there are plenty of reasons to be skeptical of shale’s naysayers this time around, too.

After all, the American oil industry added enough oil over the past three months to cover more than a quarter of the cuts that OPEC and its eleven other petrostate partners are taking off the market during the first half of this year. That’s an extraordinary achievement, and the 482,000 barrels per day the U.S. has added since mid-October suggests that this is just the beginning. The entire shale industry was born out of creative problem solving, and that spirit helped producers to reduce costs quicker and to a greater degree than anyone believed they could over the past 30 months.

We’ve said it many times, and we’ll say it again: underestimate American innovation at your own peril.

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  • Kevin

    I think the posts here on the oil market are too one sided and don’t acknowledge that sooner or later the worm will turn. Decades of history has shown that all booms turn to bust and vice versa. Shale ultimately does have some constraints that will limit it (though I suspect it’s got more legs in it).

    However if I knew with confidence when that was to be I would be using that information in the market, not posting for free on a website.

    Still acknowledging the uncertainty of the situation would be good.

    • f1b0nacc1

      I wonder. We could just as easily argue that all busts turn to boom, and hence the analyses here are entirely too pessimistic. Shale will eventually decline, but there are numerous alternatives that will replace it, and many of those end up exploiting the same technologies.

      If I had to hazard a guess (and like you, if I knew for sure, I would be exploiting that knowledge by shorting the market, evading my taxes, and arranging to live a life of luxury with a horde of beautiful women and a small team of experts dedicated to finding new ways to be nice to me), I suspect that the various fossil-based solutions will suffice until we end up with useful fission or fusion based alternatives…but then what do I know?

      • solstice

        What you should know is that, pretty soon, you’ll be bowing to the altar of solar and admonishing yourself for how wrong you were about this exponentially developing technology.

        • f1b0nacc1

          Of course…absolutely….

          Now go run off and play elsewhere…adults talking here…

        • CaliforniaStark

          Solar may be an “exponentially developing technology”, but it is one that does not produce much energy. At present solar produces about 0.6% of U.S. electricity, and about 0.2% of U.S. energy. Its exponential growth rate will result in it producing over 1.0% of U.S. electricity in the next decade. Only the most optimistic estimates predict that solar will produce more than 10% of electricity in 2030; and that depends on its continuing tax credits (30% at the federal level), and net metering. As has been shown in Hawaii, without net metering, new solar installations tank.

          Believe that solar has its place, and hope the technology improves. It is an excellent energy conservation measure. In areas with a lot of sun, installing solar on new homes makes sense economically, and some jurisdictions are even mandating it. But solar will always be a subsidiary power source, and does not have the ability to produce more than a small percentage of the nation’s energy need. An energy source that produces electricity part-time during an eight hour window each day has limitations that are cannot easily be overcome.

    • Andrew Allison

      “Experts” have been confidently predicting peak oil in 10-15 years since the 1880s. Meanwhile, the proven reserves continue to increase. Of course nothing lasts forever, but forever is a long, long time. Meanwhile, two months ago:

      • CaliforniaStark

        “America’s economic joyride is coming to an end: there will be no more cheap, abundant energy…” @PaulREhrlich 1974

        Actually believe that President Obama believed in the peak oil theory, and it is one of the reasons he did not interfere in the shale oil boom. Obama thought that oil/natural gas would run out quickly, and when it happened the renewable energy companies he was heavily subsidizing would be ready to take over energy production. The regulatory frenzy at the end of his term, as well as the rushed treaties, were a belated attempt to counter his misjudgment.

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