Saudis put U.S. Energy producers to a test — and they ace it

Staff Columnist

By Mark P. Mills  

In The Wall Street Journal, Tuesday, March 28, 2017)

“Only a few years ago America’s policy makers were wringing their hands about ‘peak oil’ and dependence on imported fuels   Now headlines feature the return of oil gluts.  What happened?  Saudi Arabia undertook a ‘stress test’ of America’s oil-and-gas industry that produced unintended consequences.”

Mr. Mills is a senior fellow at the Manhattan Institute. Following his Journal piece:  “We’re witnessing the first signs of a new normal in oil markets.  Call it Shale 2.0, characterized by a potent combination: eager and liquid capital markets funding  hundreds of experienced (now lean) small to midsize companies that can respond to modest upticks in price with a velocity unseen in oil markets in eons – all using shale technology that is shockingly better than before and poised to keep improving.

This year sees the U.S. not only filling storage tanks to the brim but also exporting more than a million barrels of crude oil a day.  Exports are at the highest level in American history, twice the previous export crude export peak in 1958.  The U.S. is exporting more oil than five of the Organization of Petroleum Exporting  Countries’ 13 members.”

Is this the take-away in this piece?  Let’s see.

Mills continues:  “The stress test that brought this about began about two years ago, when Saudi Arabia decided it would try to tame American shale oil and gas production.  The technology of hydraulic fracturing, which began to emerge barely over a decade ago, led to the fastest and largest increase in hydrocarbon production in history.

Oil prices started to collapse in 2014 because American shale businesses oversupplied markets.  The Saudis responded by increasing production, which drove prices even lower.  Their theory was this would wreak havoc on small and midsize petroleum upstarts in states from Texas and Oklahoma to Pennsylvania and North Dakota.

The fall from the $120-a-barrel stratosphere to under $30 did take a toll on producers everywhere.”

(When your correspondent went to work in the Kingdom, at Jubail, oil was priced at just above that $30 a barrel figure.  We thought that was quite high.)

More from Mills in the Journal:  “ Businesses reduced investments and staffing, and many went bankrupt.  It also deprived OPEC member states – and  Russia, it bears noting – of hundreds of billions of dollars in revenues, forcing them to tap sovereign-wealth funds and cut domestic budgets.

Something else happened.  Little noticed  outside the petroleum cognoscenti, shale technologies kept getting better.  The productivity – output per shale drilling rig – has been rising by more than 20% a year.  That means every 3 1/2  years the average rig produces twice as much oil or gas.  No other energy technology of any kind is improving at that rate.  Put another way, the cost to produce shale oil keeps falling.”

“It’s entirely feasible for America to become a far bigger oil exporter, even one of the biggest.”

More:  “As a result, with an assist from a modest increase in oil prices, shale investors and drillers are returning.  Bad as that is for OPEC, the really frightening prospect is that software tools and techniques will now start to invade the shale domain, one of the least computerized industrial sectors.  ‘The cloud’ will be just as much of an economic accelerant for shale as it has been for other complex and distributed industries.

For the Saudis and other oil oligarchs, the worrisome feature of Shale 2.0 is that software enhances the most remarkable feature of shale production: velocity. The thousands of small to midsize shale operators and investors make rapid individual decisions, each involving a tiny fraction of capital per decision compared with the supermajors.   This fluid, chaotic, very American entrepreneurial environment operates in private markets, largely on private land, and can expand or pull back with  a volume and velocity unseen in oil markets in a century.

The U.S. still imports oil (for now), but net imports have declined by half.  America is now the world’s biggest natural-gas producer and has become a net exporter. Other places can gush hydrocarbons into markets.  But they’re all slow-moving, in some cases monopolistic leviathans. “

Mills concludes: “ It’s hard to imagine a more potent combination than a huge market, willing investor and galloping software technology.

Such is the power of shale and software.

It is not what the Saudis had in mind when they launched that stress test.


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