Can Anyone Replicate the US Shale Revolution?

An oil rig on the sunset

The US shale revolution has altered the trajectory of the US energy sector, but can that success story be replicated anywhere else? Let’s head down under and examine Australia’s shale potential.

The Aussies have some promising geology, but lack practically every other metric that contributed to the success of the US shale revolution: abundant water, proximity to cities and infrastructure, deep labor pool, fast-moving regulators, and favorable mineral rights for landowners. That last one is the big one, because without that monetary incentive for landowners…what’s motivating anyone?

There are some other countries that have a better shot at replicating the US shale boom. Argentina already holds the second-largest shale industry. Mexico and Canada have the shale resources, but their industries are so tied to American infrastructure and markets that the US would have to help.

Prefer to read the transcript? Click here

Transcript

Hey everybody, Peter Zeihan here. Coming to you from Colorado. Today we’re taking a question from our Patreon page, specifically from one of our friends down in Australia, wondering if it would be possible for Australia to recreate the sort of energy complex that the United States has, courtesy of the shale revolution. The United States is now just a gross over producer of both oil and natural gas. 

It’s driven down energy costs in the country, especially electricity costs, which are now among the lowest in the world. And it’s generated a robust processing and manufacturing system with downstream work and a significant export industry, Australia having a smaller population, but almost as much land could they do it? I don’t want to say no, but there’s some things you have to keep in mind. 

Number one, geology is just the first step. So in order to have a shale industry, you have to have a lot of sedimentary layers that are petroleum bearing that just the right age to generate oil, natural gas. And the United States has that because in the past, the North American continent, especially our part of it, has had a series of shallow seas. 

And then geology would change, and then you’d get another shallow sea and you basically got these stacked layers so you can drill down and hit multiple petroleum producing zones. In fact, in some places in West Texas, you can have upwards of 20 layers that you can all access from one vertical. Now with shale technology, you go down it until you hit that layer and then you go horizontally. 

And that brings us to the second thing. You need water. The way shale works is you make this suspension of water and sand, and that is pumped into the lateral through a series of holes that basically crack the, rock open and release the petroleum. And then back pressure pushes all the liquid out and eventually oil and natural gas comes to the surface. 

Don’t have to pump the stuff, but you have to have the water to do it. And part of that folds into the third issue, which is proximity. You have to have relative proximity for your oil and natural gas production. Two population centers are places that can take the stuff for processing. And in this this the United States is pretty good. 

We have shale zones in Texas, which of course can get pumped to corpus Christi in Houston. And the rest we’ve got some in Colorado which benefit the Denver area. We’ve got some in Ohio which can be pumped into the Northeast and Pennsylvania. Same thing. Australia’s problem is that most of the geology that looks promising is in the outback. 

So not only is it a long ways away from any potential population centers, you’re in the middle of a literal desert, so the water access is more difficult. You can access groundwater that’s done in the United States, too. But all of these things incrementally raise the cost of development. Let’s see what else. Regulatory structure. This is one where a lot of countries, trip up shale wells, as a rule, generate somewhere from the hundreds of barrels to thousands of barrels a day, which sounds great, but it’s not like the mega wells you’re going to get a place like, say, Saudi Arabia. 

So you’re going to have more of them and they’re more involved from a technical point of view for production. So you have to have a more advanced educational system to generate that sort of workforce. And the United States really does stand out among the world when it comes to petroleum engineers, because we’ve been doing it for so long. 

The shale revolution at this point is about 20 years old. In the United States. Our first oil deposits were back in the mid 1800s. So this is something that we’ve been going and going and going. It’s not that the Australians don’t have that, but most of what the Australians have been doing for energy production in the last 30 years has been offshore, where they tap foreign labor almost as much as local labor. 

So there’s there’s a labor crunch there. In addition, if you live in Houston, you can work in West Texas. If you live in Sydney or Brisbane, you’re probably not going to be working on the northwest shelf. It’s just too far. So linking these together, and then on the regulatory side, you have to be able to do things on the fly very, very quickly and have a regulatory structure. 

That’s okay with that. So in Texas, the Texas Railroad Commission, which is the one that regulates the space issues, permits 24 hours a day, 365 days a year. They drill on Sundays, they drill on Christmas. And if you don’t have an institution set up to handle that, everything else gets pushed back. This is one of the reasons why the shale attempt in Poland just didn’t work out, because the poles tried to work European hours and it just didn’t fly. 

The geology wasn’t as good either. But the most important thing, the single most important thing is landowners have to have an interest in the industry. So in the United States, unless you have signed it away, you own the mineral rights on your land. So if a petroleum company comes and wants to drill in your land, you get a chunk of the proceeds. 

We’re the only country in the world that does it that way. So when the United Kingdom tried to kick in the shale that ten years ago, they discovered huge amounts of local opposition because the companies would take all of the money, and that would be that the locals had to deal with the noise and the traffic and all the rest, and they saw absolutely no benefit. 

Australia is kind of in that camp. So if, if, if this is going to happen, it’s going to take a lot more money and put a lot of pressure on the labor force and require a regulatory and maybe even a legal overhaul of property rights in Australia in order to generate the sort of outcome that you might want to see. 

There are three countries, however, that are worth keeping an eye on when it comes to shale that are closer than Australia to achieving something like the United States. The first, ironically, is Argentina. They already have preexisting infrastructure in a place called vacuum worth a dead cow fields which are very close to populated Argentina, including Buenos Aires. The socialist governments of the past set a price floor. 

So anyone going to invest knows how much they’re going to get out. So even though the property law structures are weird and it’s Argentina. So if they’re very weird, if you know the rules of the game on the day that you start, you can get some projects going. And so Argentina already has the second most successful shale industry in the world. 

The other two to watch are Mexico and Canada. both have a shale fields that in many ways are extensions of the American geography, especially northern Mexico. The weird thing about Canada in Mexico, though, is their closest population centers for most considerations around the American side of the border. So if we’re going to ever see a successful shale industry in those two countries, it will be because they’re accessing American infrastructure, population structure, processing infrastructure and basically linking into a greater North American energy grid. 

Doesn’t mean it can’t happen, but if you’re in Ottawa or Mexico City developing a local energy sector to serve another country, let’s just call that a bit of a political complication.

The Fourth Shale Revolution: Supermajor Tech

ExxonMobil neon sign at a gas station

ExxonMobil has introduced a new type of proppant that might just spark the next US shale revolution.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here. Coming to you from Los Angeles on the California coast. And today we’re to talk a little bit about oil. There have been a couple of technological breakthroughs that I think are worthy of mentioning in the shale era. So ExxonMobil, big company, one of the largest players in the world, produces just under 5 million barrels a day. 

Has basically started mucking around with something called prop. So dial back…Hydraulic fracturing or fracking was basically how the United States produces 80% or more of its crude oil these days, as well as the vast majority of its natural gas. It’s not a fringe technology. It’s the backbone. What you do is you drill down vertically, and then you make a horizontal split that goes two, three, four, maybe even five miles. 

And then you inject water that is laced with sand. The water hydraulics, does not compress under pressure. So it cracks the rock apart. And then the water goes in with the sand and accesses tiny, tiny, tiny, tiny little deposits of petroleum. Then you stop the pumping. And because those tiny pockets of petroleum have now been exposed, they produce a back pressure that pushes the water out, but the sand stays lodged in the cracks, keeping them open so the flow can continue. 

The sand is called it, and it’s one of the biggest expenses in a fracking operation. Well, what ExxonMobil has now done is change the prop and is triggering what is basically the fourth shale revolution back backstory for that first shale revolution is when we figured out how to do this and brought out natural gas. The second shale revolution is when we figured out how to do this to bring out liquid oil. 

The third is when we built the infrastructure. Things like LNG facilities or chemical facilities or refineries to metabolize all this raw product where we’re now producing all of that stuff, all of that’s in the past. Fourth Revolution is taking the capital and the technological skillsets of the majors, like Exxon, and applying them for a whole new generation of technology. 

So one of the weird things about the shale revolution is when it started most of the super majors and kind of written off the American oil patch, and we had seen oil output from the United States dropped to historical lows well over the last century and a half. 

What that meant is we had small mom and pops that were doing everything, and they were trying everything they could come up with in order to get incremental increases. 

And that’s what generated the first few million barrels a day. Well, as time went on, oil does what oil does. And it rises and it falls and it rises and falls. And so we got a series of busts, and ExxonMobil was able to come in with its better capital position and buy up a lot of the smaller companies, to the point that it and Chevron now dominate the space and collectively produce almost 9 million barrels a day. 

Now you apply what Exxon has across its entire value chain, and you get a very different proposition. So for profit, specifically what we’re talking about today, they went into their refineries and they found waste product, something called petroleum coke. And they were able to manufacture that into a kind of a synthetic sand, if you will. The profit is where a lot of experiment has been going on and a lot of subsectors for the last several years, and you got some pretty expensive stuff that’s called ceramics called ceramics. 

It is ceramics. Petroleum coke is cheaper than that, more expensive than sand. But the real advantages it has that it’s a lot less dense, maybe 40, 50% less dense than sand, which means you can suspend it in the water better, which means it pushes into the formation better, which means it holds open cracks deeper in the formation. 

And for a small increase in cost, using what used to be a waste product. Exxon has seen their numbers increase by 10 to 20 to maybe even 30% in some wells. And that alone changes the math of the shale revolution a ten to a 30% increase in output for only a slim investment in what was a waste product. 

That’s amazing. And so the shale revolution is nowhere near done. You’ll hear people saying that eventually the shale revolution going to run out. There’s only much oil, but that misses the point. In the pre shale era, we were able to access about 10%, 9 to 10% of global energy reserves. There’s a lot down there that we just don’t have the technology to get to. 

The shale revolution doubled the percentage of what was accessible within the US space. So we’re talking about 150 years of output. All of a sudden we have access to something like that again. And we keep making these incremental increases, like with profit, that pushes the horizon back even further. So the shale revolution continues to set new records for output, adding somewhere between a half a million and a million barrels a day per year, and has now been doing that since 2009. 

You get a lot of output when you do it for that long. So this year is not the last year the shale revolution. Neither is next year or the year after or the year after that. 

Because the numbers keep getting better, the technology keeps pushing further, and the break even cost for what it takes to get a chunk of oil out in an economically viable way keeps going down.

No Shale for Europe

Photo of black oil barells

The US oil industry has seen a massive boost thanks to the shale revolution, but can the Europeans replicate the success the US has seen?

Unfortunately for Europe, there are a lot of things working against them. Problem one is that Europe just doesn’t have the right geology to make this work. They are also missing the decentralized network of small companies that helped build out the shale network in the US, they lack innovation, and they don’t have a rapid regulatory approval system. Aaand there is no financial incentives for landowners due to the legal barriers in place.

In the short term, this doesn’t look very plausible for the Europeans. They would need to buildout all the infrastructure, under perfect conditions, and even then it would take a decade to MAYBE get one million barrels per day. So, oil imports from the Middle East and US will continue.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here coming to you from a brisk Colorado. Today we’re going to take a entry from the Ask Peter forum. Specifically, what would it take for Europe to experience an American style shale revolution? The continent is a massive importer of oil and natural gas, and they don’t exactly have a lot of territory that is good for sun or wind either.  

So their choices really are nuclear, which let’s just call that problematic in some places, or imported. And if you’re importing, then you’re at the mercy of whoever you’re buying the stuff from, as they discovered with the Ukraine war, when that is Russia, that’s a problem. And as I discovered in the 70s and 80s, when that’s the Middle East, that’s a problem. 

And then, of course, most European countries don’t have a production base navy, so they can’t even patrol their own supply lines should someone in between decide to cut them off. So, you know, reasonable question. Well, there’s a couple things that they really can’t do much about. And then there’s a couple things that they can, but I doubt they will. 

So let’s start with what they can’t fix. Geology. Yes yes, yes, 90% of known oil and natural gas is in unconventional rock formations like shale. But that doesn’t mean that all shale deposits are created equally. So if you consider the United States, we’ve got the Permian, which in some places has 20 different stacked layers, each with their own petroleum layer, little jumbled together, but for the most part, pretty easy to get to. 

So you can drill down through one, do laterals go down to the next one, do laterals go down the next one? Do laterals and the whole thinking funnel up through a single point of extraction. It’s by far the best in the world of that geology, and it’s, as far as we know, the only one in the world, there are tiers. 

The Marcellus, in the Pennsylvania area is still pretty good, but it’s mostly gas, whereas the Permian is mostly oil. You’ve got the Bakken in North Dakota. That’s somewhere between, and the Europeans just don’t have the type of deep sedimentary geology that the United States or that North America specifically has. So it’s not that there isn’t oil and gas to be had. 

It’s just it’s probably not going to have the same bang for the buck, even if all else was equal. And of course, all else is not equal. The way the United States started its shale revolution was with hundreds, if not thousands of mom and pop companies. And so we developed the expertise as we went. But it started from kind of a baseline understanding, especially national lands in the United States. 

Small mom, the pops are the wildcatters that basically drill or have rights to small chunks of acreage and drill whatever’s best in that acreage. And they’re constantly trying new things. And in doing so, eventually they crack the code on shale. In the last few years, that has evolved quite a bit. And now the super majors have taken everybody’s best practices and are now doing some really aggressive iterations using things like artificial intelligence. 

And overall, since 2012, we’ve probably seen worker productivity in the area increased by 350 to 400%, which is by far the record for any subsector in any industry anywhere in the world. And that’s before you consider that, we’ve gotten much more efficient with the equipment. So we’re actually getting about two and a half times as much crude as we did ten years ago. 

But with one third the number of drilling operators, if you’re going to do this in Europe, you basically have to create it from scratch. With the notable exception of the United Kingdom, there is no constellation, no environment of small and medium sized players. Get your big national players that are de facto monopolies, and that’s about it. And with the possible exception of France’s too Tall and to a lesser degree, BP and EA and I, you know, none of these guys or what I would consider at the technological edge. 

So simply getting into shale in the first place would be a big leap. But at least that’s something you can do something about. The other issues are far more problematic, but luckily there is a little bit of hope here. The first one is proximity. One of the reasons why the U.S show revolution has been so successful is when the technologies were first pioneered, they were pioneered on the edges of projects that had already been in production places like the Marcellus in Pennsylvania or the Permian in Texas. 

And so there was already significant takeaway capacity was just waiting to be used. All the legacy pipes from previous oil booms, we weren’t exactly dormant, but they were certainly had a lot of spare, space in the pipelines. And shale was able to flow right in there. And most of the expansion we’ve seen in the last eight years has been about expanding that takeaway capacity, because it’s all the old stuff been maxed out in Europe. 

Their mature fields have been abandoned for decades. And so on the off chance that there is any infrastructure left, it’s probably going to have to be completely rehabilitated. In addition, a lot of the best geology we are aware of in Europe is directly under where people live. So, for example, we know there’s a good shale geology under the some of the lowest sections, lowest in elevation in the Netherlands. 

But you know, if you get any land subsidence, you all of a sudden have lost part of your country. So the chances of drilling there are not very high. And the richest shale deposit we’re aware of is under Paris, specifically under the roof. So the idea that the jewel in the crown of French historical preservation is suddenly going to be an operating oil extraction site. 

I don’t think so. This isn’t the United States where there’s still oil production on Wilshire Boulevard. They have a very different attitude towards things in Europe. 

The final issue, which is arguably the single largest, obstacle is legal rights in the United States, unless something has been negotiated otherwise, under the land you live on or own our mineral rights that you also control. 

So if somebody decides they want to come into your neighborhood and drill and they get your permission, you get a cut. Whereas there is no country in Europe where that is the case. So if somebody were to come in, they’d get permission of the National government, and then the national government would get not just the oil and gas, but all the money that would come from it. 

And you get nothing. So you’ve set up a situation where you can guarantee very strong opposition from regional governments, local governments, landowners, renters, everybody, because they don’t see any of the immediate benefit, unlike how we have it here. Now, technically, that is a legal change that is up to the individual countries to shift, but doing so would be would be a bit of a heavy lift. 

So even if in a perfect scenario, the Europeans could just wave a wand and change the legal structure without public opposition and all local landowners and adjacent interests were immediately on board. And if they started building out the infrastructure for takeaway capacity today, and if they retooled their entire educational system to generate the scads of workers, that they would need to do this at scale the soonest, that you would probably see a million barrels a day fresh output, from Europe as a whole, would probably be 8 to 10 years from now. 

And to be perfectly blunt, I don’t have that kind of time. The only way that the Europeans are kind of holding things together right now is with imported oil from the Middle East, an imported natural gas from the United States, and liquefied form that is more stable than their previous import menu, which was Russia heavy. But to think that that has ten years to run, in an environment where so much geopolitically is so unstable and changing so quickly, they’re gonna have to figure out another way. 

One more thing. Regulation. This is something that Europeans obviously can do something about. And I’m not talking about here about a relatively anti-business, pro-environment regulation. Obviously, if you’re going to have a robust energy sector. You have to make some compromises there. That’s not what I’m talking about. I’m talking about turnaround time. So the Texas Railroad Commission, which regulates the shale space in Texas, is famous for fast turnaround times.  

They accept applications for drilling permits 24 hours a day, 365 days a year. And in Texas, people drill and Christmas and Thanksgiving and Easter and all the rest. And most of the operations at most of the wells are operating at least 16 hours a day. They just rotate crews. The two examples I can give you of countries in Europe that have attempted, to try shale are the United Kingdom, Poland, the United Kingdom basically drowned everybody in paperwork. 

Very British. And as a result, getting things approved wasn’t measured in days or weeks, but months. Because there was always one more form. It was like working for the U.S. Defense Department. And when they discovered that the geology in the United Kingdom, is, the oil bearing stuff is less dense, it’s in smaller deposits and it’s more spread out, and it’s a lot deeper. 

Everyone pretty much walked away. The other country that tried Poland, had a little bit better geology, but you still had a problem with just permitting. You could file for your permit between 9 and 5 Monday through Thursday. And, God forbid, it was a holiday because, you know, the Europeans have a bunch of those. And this is an a country that actually has a strong national security interest in independent energy production. 

But foreign companies just couldn’t get it to work. And Exxon, you know, that dainty, demure company that never gets its way ultimately just threw up its hands and walked home? So unless you have that change in government culture, it’s really difficult to imagine this moving 

While U.S. shale operations now are getting more and more oil out of each individual, well, now measured in the tens of thousands of barrels a day, often, if you’re going to start new, with a new sector, with little expertise and especially without, say, the Permian geology, you’re probably only going to be getting a few hundred barrels per day. So the barriers between you and your operation that the government puts up needs to be very low for it to be worth that effort. And right now, the incentives in the United States versus Europe are just completely flipped. Okay. Now I’m done. 

Ask Peter: Can Other Countries Replicate the US Shale Revolution?

Energy independence has been a global priority over the past few decades, but not all of that black gold is created equal. The US has been able to capitalize on deposits of oil-bearing shale, so can others replicate this success with different types of oil?

The United States’ success isn’t quite copy and paste. Between private ownership rights ensuring personal gain, specific geological formations leading to huge deposits of oil bearing rock, and technical expertise, the US has flopped the nuts in this game of oil-poker.

There are some others that may have one or even two of these conditions, but there are plenty of obstacles they’ll have to overcome. Argentina is the outlier in all of this, since they have the shale, technical skills, and the government sets oil prices to ensure profitability for operators.

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

Generating Geothermal Energy Using Shale Technology

The Google-backed company, Fervo Energy, has launched two geothermal projects that use preexisting shale technology and infrastructure to generate electricity. Could this be a partial solution to the looming electricity shortage?

The pilot project in Vegas is too small for me to place any bets, but the next project in Utah aims to be on par with other large power plants. This technology allows us to tap into the Earth’s crust, detect and access hot zones where they might not typically be found, and develop a reliable and dispatchable energy source.

Again, don’t go counting those chickens until we hear back on whether this project was a success or not. In the meantime, we’ll appreciate this technology as a refreshing solution in light of a rather hefty need for power supply expansion.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

TranscripT

Hey, everybody. Peter Zeihan here. Coming to you from the Denver International Airport, where I am waiting for my flight. It’s my last business trip of the year, so it’s kind of exciting. Anyway, it’s early December, and the news is that in late November, a new project for geothermal launched near Vegas. And by launch I mean began operations. And I’m just starting drilling.

It’s Furbo energy. It’s backed by Google. We don’t have any data on what their cost point is because, you know, it’s Google and as a pilot project. But Google has been sufficiently excited about it to go ahead and launch another project in Utah. The one that’s in Vegas is only about three and a half megawatts, enough for about 2600 homes.

So very, very small scale by really any power plant standard. But the next one is going to be 400 megawatts, which puts it up there with some of the larger power plants in the world, assuming that it is spec, geothermal is awesome where it works because you can tap heat within the crust to generate steam and use the steam to generate electricity.

It’s green. It doesn’t have any chemical issues. And one of the best things about geothermal is you can use it either for surge or for baseload. You just decide when you’re going to use it, which makes it a lot more reliable and dispatchable than, say, solar or wind would be. Because, you know, the earth is pretty much always hot.

That’s part one. Part two, what makes this interesting is that it’s not a typical geothermal project. So normally with geothermal, you’re tapping something like a geyser or hot water worth a hot spot that’s relatively close to the surface, usually within just a few hundred feet. But this is the first project that’s been attempted in so far successfully that uses shale tech to go after a different sort of geology.

So rather than letting the earth put something that’s up close to the surface that only happens in a few places, it’s almost exclusively in the Rockies. And as you guys know, the Rockies are not exactly densely populated. So geothermal with the old style is only providing about 0.4% of overall American electricity supply. But with the shale tech, you can drill down, in this case, 7000 feet into a hot spot that is nowhere near the surface.

And that means assuming this works and works at scale, that means we can do this everywhere where there’s shale, where there’s not geologic activity. You’re not going to do this in the San Andreas Fault, obviously. Let me do a better job of explaining that the two things that make shale technology really appropriate for geothermal and you know why it works in general is, number one, you’ve got really good acoustical detection by using some version of sonar and you can bounce sound waves off of different types of formations at different levels within the formation and map them out from the inside out.

That’s how they know exactly where to go to the petroleum rich strata when they’re doing oil and gas production. And then second, drilling has advanced in courtesy of shale. So you go down and then laterally in order to access whatever the specific layer is that you don’t have in a straight line. So it’s like you can go up into like the fingers of a curved hand.

So you apply this to geothermal and really what you’re looking for impermeable zones that are really, really hot, and you can pick that up with the acoustics. So by taking these technologies, you can go to the best, densest, hottest material possible in order to then run your liquid into it, which it then captures the heat, which can then be used to generate electricity that is potentially a game changer.

One of the big problems the United States is going to be facing over the course of the next decade is a massive, massive shortage in electricity. Even if we don’t do the green transition, even if all we do is reshore a lot of manufacturing to deal with a post China world, you’re talking about conservatively expanding the power supply by 40%.

50% would make me feel a lot better. That includes processing for things like aluminum and lithium and the rest. You know, that’s a lot of power. We haven’t had that kind of power in decades. The green transition would have problems on top of that. And so if we can take something like geothermal and existing technologies that are now off the shelf and apply them at scale in all 50 states, now you’re talking about a very different sort of math, because these things can, in theory, come online pretty quickly.

And so those of you who follow the shale sector know it only takes 6 to 12 weeks to bring a shale project online. And most of that is involved in the drilling and the fracking. Oh, that’s exactly the technology we would be applying to geothermal. So obviously it’s not a complete plug and play. Electricity is different from generating oil or gas, but the the technology and the ways that confusion are very promising.

We’re just waiting from Google to find out what the numbers are, to know if this is economically viable or not. And that’s the whole point of the Utah project. Okay. That’s it. Take care.

 

The Third Shale Revolution: Reshoring Manufacturing

The third piece of the shale revolution is all about timing. As the world shifts from globalized supply chains to more localized and secure means of production, utilizing cheaper energy sources and products will be essential.

The US has become the lowest-cost-highest-quality producer of intermediate materials, meaning much of the leg work to reshore supply chains and manufacturing has already been done. So what do we have to show for it?

Between agriculture, wiring, textiles and refined products, the US has shaken up dozens of industries and ramped up reshoring efforts. While industrial construction spending has grown significantly, we must maintain that growth to retain this newly added competitive advantage.

Reshaping the US manufacturing landscape is no easy feat, but access to cheap power and materials surely doesn’t hurt. With the foundation already laid, the US has a considerable leg up on other potential sources like China and the Persian Gulf.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

Transcript

Hey everyone. Peter Zeihan coming to you from Colorado where fall has firmly set in. Today we’re into the third part of a three part series on the shale revolution. The third shale revolution. Phase one was the production side. Phase two is processing and turning things into fuels and intermediate materials that we use in pretty much everything. And the third revolution is everything.

One of the truisms of the last 70 years of globalization has been that material production and manufacturing moves to wherever the competitive advantage happens to be, regardless of national identity. And that means that a lot of energy intensive industries moved out of the United States, particularly after 1973, because oil prices were cheaper or electricity high prices were cheaper, natural gas prices were were cheaper.

Or the processing process was less expensive, usually due to things like labor and environmental restrictions that we might have here that we don’t have in places like, say, China or Egypt that is in the process of unwinding that between globalization and a new appreciation for national security as a component of economic activity. More and more things are being reassured, and the shale revolution has gotten us a jump on this because the shale revolution has provided the United States with cheaper oil, cheaper natural gas, cheaper electricity and cheaper chemical products than anywhere else on the planet.

In part, that’s because natural gas is largely a byproduct here, but mostly it’s because the break even price and a lot of shale fields is now very, very low. And in fact, in the Permian Basin, which is the largest one in the United States, which is responsible for over a third of our overall energy production, it’s less than $11 a barrel on average compared to, say, places like Saudi Arabia, where it’s really cheap but still more than 20, or places like Russia, where with all of their Siberian work, you’re talking 30, 40 and even $50 a barrel.

So huge price advantage. In addition to the changing understandings of security. And what that means is the United States already this isn’t something that’s in the future, already is the lowest cost, highest quality, lowest pollution index producer of every one of the intermediate industrial materials that can come from energy products. And what we’re seeing now in this third phase of the shale revolution is those are being turned into manufactured goods.

And it’s really difficult to find a manufacturing subsector where this is not a game changer. Let me just hit a few of the highlights. First of all, agriculture, natural gas is turned into nitrogen based fertilizers. So where the U.S. is now the world’s largest producer and we’re seeing more and more of that value add chain come back. Even when the United States became the largest producer of natural gas and ethane, we were still shipping the intermediate products abroad, primarily to places like the Middle East or China for processing to finish fertilizer.

That is changing day by day for those who you think we should go organic help god. You are so bad at math. Organic fertilizers require multiple applications over the course of the year, which requires a lot more carbon input. In addition, they require about an order of magnitude more energy to produce in the first place. And if you’re going to be moving six, seven, eight, ten times as much of the stuff, you can imagine what the carbon footprint is for transport.

The same goes for pesticides. Most pesticides in the United States now are a once or twice and done for the season, as opposed to something you have to put on every few weeks in case you want to go organic. Another industry that’s seen a lightning change is wiring, which I know doesn’t sound very sexy until you realize you just go through your life and look at everything that uses electricity that includes your car.

Even if it’s not a an electric car. Anything with a wire has to have a protein. And those coatings are almost exclusively if you produce with some sort of petroleum derivative. Normally the wires are pulled from the metal close to the point of manufacture. So every industry that reassures is going to do more and more of that at home.

And since the coatings come from a petroleum derivative, the United States now has a huge economic advantage in addition to the security advantage over almost every other player. This means that whether it is automotive or electronics or semiconductor, there’s there’s a fairly large petroleum footprint that has nothing to do with energy. One of the things that folks forget is that we use petroleum for a lot more things than just burning.

And before 2015, about one fifth of the oil that the United States used was used in refined products that were not fuels. As we double the size of the industrial plant over the next several years, that number is probably going to at least double, especially if we continue down this path of ever more fuel efficient vehicles. More and more of the petroleum we use will be used for things where it’s not burned, which means that the carbon footprint is an order of magnitude less than it is for, say, gasoline.

Okay, what’s another one? Textiles. Not everything is cotton anymore. Any type of synthetic fabric. Like, you know, what I’m like or what I’m wearing right here. That is 100% of natural gas and petroleum derivative. And as such, that is the frontier in low carbon clothes making, because you don’t have to grow this. It’s just a byproduct of a natural form, of a natural, but of an industrial process where very little is actually emitted.

Polymers are all like that. Let’s see what semiconductors. I mean, obviously, the silicon is important and obviously you need dopey materials. But those dopey materials, as a rule, involve a lot of petroleum materials and there’s wiring throughout the entire process. In fact, it’s difficult to find a manufacturing sector where a petroleum derivative is not one of the top three or four components in it.

That’s true for automotive. That’s true for aerospace. That’s true for white goods. That’s true for heavy equipment. And now that all all of these materials are already being produced here, it’s really easing the pace at which the United States is reshoring industry from the rest of the world. So we have seen industrial construction spending, spending in the United States expand by roughly a factor of eight since just five years ago, and it’s almost tripled in just the last 18 months.

This is a good start. We need to do a lot more because we need to expand what we’ve done in these last five years by at least a factor of four and hold it there for at least another five years. And that will be inflationary and that will lead to labor disputes. And there’s a fierce competition among the American states as to where this stuff is going to go.

But the fact that the shale revolution has given us cheap power and cheap materials to do it at whatever scale we want. From a certain point of view, a lot of the hard stuff is already done. Everything else is a known quantity. Anyone else who wants to do this ultimately is going to have to import those materials, and there are only three real sources for them at scale.

China. The Persian Gulf. And here.

The Second Shale Revolution: Industrial Expansion

So, how did the US use all that crude oil and natural gas produced during the first shale revolution? As the need for industrial expansion grew, so did the American refining industry’s footprint.

That’s the essence of the second shale revolution – America could now turn that crude oil and natural gas into a suite of products, ranging from refined oil to intermediate chemical products.

This industrial buildout helped prop up the green transition by offering a flexible backup fuel source for solar and wind power. Ethane, a byproduct of all that natural gas production, gave way to the US becoming a major producer of fertilizers and plastics.

As the US continues to extract this light sweet crude, more processing capacity will be needed to handle the surplus. This will likely cement the US as the world’s largest exporter of energy and energy-derived products in the coming decade.

As you may have guessed, that’s not the end of shale’s story in the US…so I’ll see you tomorrow for part three.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

Transcript

Okay. So yesterday we talked about the first shale revolution and how it basically gave the United States top level energy independence and natural gas and oil. Today, we’re going to talk about the second shale revolution, which is what we did with that. Crude by itself is of limited use. That’s if anything, it’s a big negative. You have to turn it into something else.

And so the second shale revolution largely is about building out the industrial plants starting in roughly 2013 to 2017 in order to massively expand the footprint of the American refining industry. And we added huge amounts of distillation capacity based on whose numbers you’re using somewhere in the equivalent of 6 to 7 million barrels per day of oil and oil equivalent to take all this oil and all this natural gas into turn into other things.

Now, natural gas you can use as a power plant, fuel, and it is the single largest source of electricity in the country, sometimes where between 30 and 40%, based on which state you’re in on average. And that has broken the connection between the United States and coal, which for a long time was our largest source. And so that switch by itself made the United States, the country on the planet that had reduced its carbon emissions the most in relative terms on a sustainable basis.

Now, there is more to it than that because it has also set the stage for the green transition. One of the big problems with solar and wind is, as you know, the sun doesn’t always shine and the wind doesn’t always blow. And so you need to have another source of energy to step in when green tech cannot deliver, especially if you’re not in a place like West Texas, where the sun is bright and the wind is strong.

The best fuel source for that that we have discovered so far is natural gas, because a combined cycle natural gas plant can spin up and down and in as little as 10 to 15 minutes, whereas a coal plant can take up to 8 hours and like a lignite plant, looks like what they use in Germany can be 3 to 4 days.

As a result, the Germans have actually seen the carbon footprint go up despite spending over €1,000,000,000,000 on green tech and transmission. And all of this is a side effect and I’m sure that the frackers who put all the natural gas in the system weren’t really thinking about natural gas and the green transition when they were doing their work.

The second thing to keep in mind is, for the most part, natural gas is a waste product with Michail sector. It doesn’t earn nearly as much on the open market as, say, oil or liquefied petroleum. Gas is like propane do, and it often comes up as a byproduct or co-production. And so it’s typically sold into the system at a loss.

So not only is the shale revolution made the United States the single largest producer of the stuff and user of the stuff, it’s at a price point that is significantly lower than everyone else, which is one of the reasons why the debate around things like the green transition in the United States actually hasn’t been nearly as rancorous as you might expect because the math has been a lot easier to do.

Having that backup fuel is all part of the Second Shale Revolution, and of course there’s more to it. Something called ethane often comes up as a byproduct of natural gas production, and ethane is a chemical that’s a little bit different from methane has an extra carbon molecule. And you can use it as the base material for any number of chemical processes.

For example, the creation of things like methanol and butadiene, which provides a whole product suite that includes things like fertilizers and plastics. And so the United States has become the largest producer of all these intermediate products as well. But the same happens with oil. There’s more to producing oil than simply making diesel and gasoline. You can make an intermediate product called naphtha, which goes on to make everything from bowling balls to insulation to diapers.

And the United States is now the largest producer in all of those as well. This second shale revolution has seen a tripling of investment into the space of industrial construction to bring all these refineries and chemical plants online. And we’re not done with the Second Shale Revolution yet. One of the freaky things about oil is it’s not all the same.

You have different grades based on contaminants and you’ve got heavy sours, which is what most of the American Petroleum Complex is designed to run on. And then you’ve got light sweets, which are rather very easy to refine. But our understanding back in the seventies, the eighties and nineties is the world had run out of that. Well, everything that comes out of shale is light sweet, because it’s trapped at the moment of formation.

It never migrates through the rock strata. It never picks up mercury, the sulfur or anything else. And because of that, we actually have a massive oversupply of light sweet in the country to the tune of 5 to 7 million barrels a day of crude oil. That’s the final stage of the second shale revolution will be building up the processing capacity to process that as well.

Now, the United States is already a net exporter of pretty much every energy product. And as we build out the refining complex in order to take advantage of this local surplus, we’re also going to become the world’s largest exporter of pretty much every energy and energy derived product as well. And that’s all probably all going to go down in the next 5 to 6 years.

And that sets the stage for the third shale revolution, which we’ll talk about tomorrow.

The First Shale Revolution: Humble Beginnings

ExxonMobil neon sign at a gas station

With ExxonMobil’s acquisition of Pioneer, it’s time to kiss the days of mom-and-pop shale operations goodbye. But before we look at what’s next, let’s look at the shale journey over the last two decades.

Thanks to high oil prices in the early aughts, small shale operations could innovate and develop new techniques for extracting that black gold. Once the US was close to achieving energy independence, super majors caught a whiff of the money and started buying up those smaller producers.

This recent acquisition signals the end of an era as the super majors now dominate shale production. So what does that mean for US shale? While there will be less innovation and slower production growth, ExxonMobil will provide more stability to the industry.

But that’s only the beginning of this story…we’ll be breaking down the second shale revolution tomorrow.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

Transcript

Hey everybody. Peter Zeihan here coming to you from Colorado, where the big news from last week, which was a believe the 10th of October, was that ExxonMobil, the energy supermajor, has bought up a company called Pioneer with an all stock by about $60 billion of stock. Pioneer is the single largest producer in the shale fields in the Permian Basin, which is the most productive energy basin in the world now.

So I thought it would be great to kind of take a walk down memory lane and then take us forward into what’s going on with the energy sector in the United States and the wider world starting Michele. So short version is that there have been multiple phases to the shale breakout. It all started back in the early 2000s when the United States found itself facing kind of a double bind.

We had had a coup in Venezuela, which had taken one of the major suppliers of crude for the Western Hemisphere off. And the Iraq war had started. So a major source in the Eastern Hemisphere was offline. And energy prices hit near record levels in a very short period of time. And there’s nothing like high prices to trigger the sort of activity that’s necessary to bring new supplies to the market.

And a lot of technologies that had been part of the energy matrix for decades, in some cases over a century. They started to play with them in new ways. So the two issues in question were something called fracking, which is basically injecting water into a well with a suspension of sand in order to crack the rock. And then you pull the water back out and the sand stays behind and props open the cracks.

We’ve been doing some version of this for over a century, but that was now being combined with something called horizontal drilling, where instead of just going down and punching through a cap rock to get to a reservoir, you go down and then you go laterally across a rock strata. Shale is different from normal crude. Normally, the crude migrates through the rock formation until it hits some sort of non-porous rock that it can’t pass through.

And then it builds up into kind of a pool with a lot of pressure. So when you punch through the tap rock with a drill bit, you get pressure that pushes the oil out. And then eventually you can pump water down into that formation in order to loosen up more of the oil and get even more out. Shale is different because the rock itself was never porous, and so the little bits of energy are trapped almost at the moment of formation within the rock strata.

And so you’ve got to break them out. It’s neither of these technologies were really new, but combining them was. And as is normal, when new technologies come to the fore, it’s not the big players who do it. It was the small players. So this is not ExxonMobil or Chevron or ConocoPhillips or Total or any of the rest. These are mom and pop operations who only own a few acres of mineral rights, who would drill everything that they had.

Now, the economics of that are maybe questionable, but remember, we’re in an environment of much higher oil prices. So you had small operations that were desperate to find a way to crack the code on new technologies in order to stay in business. And since we had high prices from roughly 23 until 2008, they had a long period of high prices that they were able to operate in.

And for small companies, that meant a lot of innovation. And so we developed dozens of new techniques, kind of clustered into these two general categories. And that brought a lot of natural gas, which was easier to produce into the market. And by the time we get to 2008, we’re starting to do the same thing for oil. And of course, we had the financial crisis, so everyone got hammered.

But then we had Wall Street, who was looking for new investments. And since these small mom and pops had done so well for the last few years, there was a lot of money that came in from the stock market or bonds or joint ventures, whatever it happened to be. Now, by the time we get to 2013, 2014, these technologies had matured quite a bit, and the United States was very, very close to achieving technical energy independence.

And that meant that the super majors started to come to play. Now, starting back in the 1970s, when U.S. energy production really started declining and force the super majors knowing that there wasn’t anything left in the United States with how they understood energy production, they went abroad and well, things got ugly. Most of the countries that they started producing energy and whether it was in the Middle East or off the coast of Africa or South America, didn’t have very strong rule of law.

The local energy partners were tended to be pretty corrupt and it was a crapshoot, especially since a lot of these projects were in areas with limited infrastructure. It could take ten years of investment before you saw any return, and then it might just be nationalized. So they kind of had a crap sandwich for 30 years. Well, then they look back home and they see this flotilla of small companies just making bank.

And so they started coming back to the United States and buying of the shale plays and buying up the engineers. And sometimes even these smaller companies in total in order to learn what had been developed back home. They saw a lot of familiarity because, you know, these two technologies were not breakthroughs. And of them themselves, the the the technique of combining them, that’s where the interest was.

And so year after year after year, the companies came back in greater and greater force. The company that was first for that was ChevronTexaco, because it had a lot of legacy production from the Permian Basin in West Texas, which had been part of previous oil booms. But it also had 20 layers of shale. So they were able to use their preexisting mineral rights and buy up some of the talent that was available and apply it to what they already had.

Exxon didn’t have that option. Exxon just had to come in and bye bye, bye, bye bye. And in the meantime, Pioneer, which is a company that dates back to the T Boone’s Pickens days, if you guys know that name was a legitimate producer in its own right, but it too was just basically was hoovering up all of these small companies for a decade.

You fast forward today, ExxonMobil is like, okay, okay, okay. The crap sandwich that is the international energy industry that’s not nearly as hopeful as we thought it was going to be. So we need to do something a little bit bigger. And so they found the single largest player in the Permian Pioneer. And just and when when Exxon does a merger, whoever is after the Exxon part is still, you know, technically it’s ExxonMobil, but Mobil’s long gone.

So basically, there’s been absorbed into the Borg behemoth that is ExxonMobil. Which brings us to today. This is probably the end of the first shale revolution because the character of it all, these small companies doing massive innovation that is now pretty much gone. And the majority of the shale production in the United States now is owned by the super majors again.

So we’re back to where we were in the seventies. That doesn’t mean that production growth is going to stop. That doesn’t mean that innovation is going to stop. But things are definitely going to slow down now. Exxon has a lot more market control. It has a lot more market discipline. And when you’ve got a small company that only owns a few acres, they will drill every theoretical spot that they think they can get oil out of.

But when a huge company owns hundreds of thousands of acres of mineral rights, they’re going to drill the best spots. And when those are tapped, they will then do a little bit more targeted innovation on the next best spots and so on, which means we should expect production growth to be less frenetic than we’ve seen in the past.

It doesn’t mean it’s going to stop. But, you know, in the last 15 years, the U.S. shale sector has set records for added production, I think, in nine of those years. Those days are probably behind us, will probably never add more than a million barrels a day a year again. But, you know, records exist to be broken. We’ll see now from the point of view of a normal person at the end of the first show, revolution isn’t going to seem very much different, but from within the industry, it’s going to be pretty significant.

Kind of the defining characteristic of ExxonMobil is it has all the stuff that it needs in-house. So it can’t just use these technologies or carry them forward. It can do so at scale and kind of turn it to an assembly line process. It’s much more reliable and gets more output for less input. Perhaps just as importantly, the defining characteristic of small companies is they don’t have a lot of cash, so they take it from wherever they can get.

Most of these aren’t publicly traded. So you’re talking about loans or bonds or joint production ventures or whatnot, whereas Exxon can fund whatever it wants. So in the old days now, 5 to 15 years ago, small companies were dependent upon getting capital either from regional governments or banks or Wall Street. Well, that pretty much ceases to be a concern with Exxon.

And they can do the investment day in, day out, based on their own short, mid and long term economic forecasts. And this should generate a lot more smoothness in terms of production output. But it also means that a lot of the financial ups and downs that we have seen in the energy sector that were related to things that had nothing to do with the energy sector, those are probably behind us, and it should make all of this a lot more reliable in the time to go.

And it’s time now to start talking about the second shale revolution, and we’ll hit that tomorrow.

Shale Gets Ready to Run

A data dump by the International Energy Agency this weekend indicates that OPEC is enjoying its best compliance showing at least since the 1970s, if not ever. Over 90% of pledged oil production reductions have already materialized, with a few countries – most notably Saudi Arabia – overcutting. All together over the course of the past few months, total OPEC output is down just over 1 million bpd. The past two years of low-ish prices have hit non-OPEC producers as well, forcing reductions in their collective output of another 400kbpd. Stores of both crude and refined products have thus dropped across the world. No wonder oil prices have managed to hold strongly over $50 a barrel of late.

The question now is how positive will the impact upon the American shale industry be? In this there are no good guides. The nature of shale has evolved radically not simply since the industry’s modern inception in 2007 (ish), but even more so since the plunge in the price of crude began in mid-2014.

  • Since then the most productive wells have become multilateral, with multiple horizontal spurs going off every vertical well shaft. Since each of these multilaterals is crafted by a single drill, the rig count watch is utterly irrelevant.
  • Micro-seismic techs are enabling operators to take much — if not all — of the guesswork out of drilling and fracking. Such precision drilling means not only looking at the volume of steel used per well or per barrel of output is immaterial, but also that mass layoffs of rig workers can occur with no reduction in oil production.
  • Water intensity per barrel of output continues to shrink as liquids pits are replaced wholesale by mobile water tanks. Less water usage means less cash flowing through the oil sector, gutting one of the last few “reliable” means of indirectly gauging end-output levels.
All these tech changes (and more) push down the full-cycle break-even cost of oil production, and most certainly steepens the production accelerations for future output. But it isn’t “only” technological innovation that is overhauling the industry. There are other factors in play that will have a much more immediate effect.
  • When prices were low, many operators only fracked minimal bits of their wells to start them up — preferring to wait for a price recovery before fracking them up to full capacity. That time is now, but there is no unified data whatsoever on the size of this “fracklog.”
  • Improved seismic techs enable operators to go back to previous wells and drill additional fairways. Such “indrilling” enables new production into old infrastructure, eliminating the need for new pipes, new leases or new negotiations, while generating new and sustained flows with the newest techs available.

Whereas technological changes impact national output figures over months to years in a sustainable way, these more mechanical characteristics give big one-off increases in weeks to months.

The only potential short-term ointment-fly I see is financing. Nearly all the shale operators who survived the price plunge of the past two years did so at least in part by borrowing. Even with prospects now brightening, many of them will find it difficult to take on yet more debt to expand operations. Yet even here things look surprisingly good. Capital flight out of Japan, China and the Eurozone continues to set new records. Shale bonds grant foreign investors a place to park their cash that is backed both by hard assets and revenue streams.

In my opinion shale’s next surge is going to not just hit much harder, but much sooner, than most expect. And it is likely about to get a lot better.

What do Donald Trump, Brexit, the Iranian Ayatollah, EU dysfunction, Japanese constitutional revisions and Chinese President Xi’s efforts to establish himself as emperor-of-all-he-sees-for-life all have in common? They are all great for the shale sector. Global instability of all stripes means more capital flight. More risk means higher oil prices means more stable American operators. More international recrimination means more interest in commodities both as an asset class and a security blanket.

This doesn’t “merely” mean that the output curve for the shale industry will be steeper now than in 2007-2013, but that adding a fresh million bpd to U.S. oil output in calendar year 2017 is a lazily conservative forecast. Shale isn’t just likely to overwhelm the entirety of OPEC’s cut, but the entirety of the global reduction in output all by itself.

And that’s just the start. By end-2017 all those new techs should have percolated throughout the shale patch. Full-cycle break-even prices for shale are already below $40. Give it a couple more years and $25 will be within reach.

And then the real shale revolution gets started.

As to what that looks like, sorry, but you’ll have to read the book. Check it out at this link.

At the Edge of Disorder

Last week, U.S. President-elect Donald Trump shook the global diplomatic community to its bedrock by throwing the One China policy into doubt, specifically noting, “I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.” He expressly linked One China to possible negotiations over the South China Sea and the North Korean nuclear program.

The One China concept is that meaningful, positive relations with the Chinese are predicated on public proclamations that mainland China and island Taiwan are one and the same country, and that Beijing oversees the whole thing. American acceptance of One China is not something that was agreed to lightly, but is instead part of a deeper strategy.

In the aftermath of the Normandy invasion of Nazi-occupied Europe, the Americans drew their Western allies and their major colonies together at Bretton Woods to prepare for the post-World War II (WWII) world. Pre-WWII global commerce was fiercely competitive with all countries using all levers of power to maximize their overall strategic position. Trade, finance, culture, employment, and war were all simultaneously tools and vulnerabilities. Successful states/empires would use all of them to maximize their gains in others. One result was the all-against-all nature of pre-1945 international affairs, ultimately leading to WWII.

Mount Washington Hotel in Bretton Woods, New Hampshire

At Bretton Woods the Americans changed the nature of the game. From now on the U.S. Navy would guard oceanic commerce for all participants, while the American economy would be opened to all participants. There was, of course, a catch — you had to join the Americans in their Cold War.

As the Cold War took shape new countries were admitted into the Bretton Woods system. Former Axis. Former neutrals. Developing countries. And finally, China. Unsurprisingly, Beijing insisted the Americans adhere to One China. Under Henry Kissinger’s guidance, the United States willingly and knowingly swallowed One China hook, line, and sinker. Bolstered by China, the Bretton Woods system now presented the Soviets with hostility in all directions. It was quite the strategic coup, and contributed heavily to Soviet overextension and eventually, collapse.

Yet the key factor to remember is that Bretton Woods firmly limited how the Americans could pursue trade. American market access was extended to allies for strategic reasons. Anyone could dump products on the American market, so long as they maintained their position in the anti-Soviet wall.

But the Cold War is over. Bretton Woods has outlived America’s strategic needs, and American trade policy is now evolving to serve America’s economic needs. Trump’s statement on One China is (probably) not an off-the-cuff comment, but instead a true pivot away from Bretton Woods and towards a fundamentally new strategic posture. If the American government no longer views trade as a means to an end, but instead an end in its own right, it can and will begin using issues such as trade access, maritime security, and political positions on issues such as One China to cut different deals. That changes the global strategic picture radically.

China is wildly unprepared for such a shift. Everything about the modern Chinese system was designed expressly for the Bretton Woods system. The economy is export-led. Efforts to drive domestic consumption have largely ended in ignoble failure. The economy is driven by an Enronesque flooding of the industrial sector with subsidized capital. Such growth comes at the cost of sustainability and a functional banking system. China’s strategic position is completely dependent upon the United States offering market access and guaranteeing freedom of the seas for China’s merchandise exports and raw material and energy imports. Remove the economic and strategic cover of Bretton Woods, and it all comes crashing down.

Hong Kong Special Administrative Region of the People’s Republic of China

Even mentally the Chinese are not prepared for change. Since the election, the only American that Beijing has reached out to is none other than Henry Kissinger himself, the only statesman the Chinese respect and trust. But while Kissinger remains strategically brilliant, his connections and advice are firmly rooted — critics might say mired in — the Bretton Woods age. Beijing is so in love with its China Rising mantra — again, made possible by Bretton Woods — that it just cannot come to grips with the fact that the Americans might now have other plans.

Or that the Americans hold most of the cards. No surprise that Chinese state media’s response to Trump’s offhand statement could best be described as a seizure.

The Chinese are not alone:

  • Like China, modern Germany was expressly designed to maximize exports to the Bretton Woods system to the point that nearly half of German GDP is export-driven. In fact, the entire EU project relies upon the United States market as well as U.S. military protection for commodity import supply lines. Other countries heavily dependent upon global trade include — but are far from limited to — South, Korea, Taiwan, Singapore, Thailand, Japan, the oil producers of the Persian Gulf, Egypt, Australia, New Zealand, Brazil, Uruguay, Paraguay, Algeria, South Africa, and Israel. If these countries — or any others dependent upon trade — are going to retain market access and maritime trade opportunities, they will need to offer the Americans something in return.
  • A whole host of countries are utterly dependent upon implicit or explicit U.S. security guarantees. A partial list includes Estonia, Latvia, Kuwait, Lithuania, Poland, Saudi Arabia, Georgia, Azerbaijan, Finland, South Korea, Germany, Romania, Qatar, the United Arab Emirates, Taiwan, Japan, Sweden, Singapore, Croatia, Denmark, the Netherlands, Turkey, and Israel. If these countries are going to retain that strategic cover, they must give the Americans something the Americans find useful.
  • Part and parcel of the Bretton Woods system is the guarding of energy flows, in particular those out of the Persian Gulf. Remove American guarantees and the countries of the Gulf have to resolve their security issues themselves. That endangers energy flows at the point of production, within the Gulf, at the Strait of Hormuz, and even globally as importers must take supply protection into their own hands.

Of course, there is still a lot of wiggle room in all of this. And regardless it won’t all change (or fall apart) overnight. Some relations (like U.S.-Japan) have more ballast. Others (like U.S.-Australia) are so rooted in cultural, strategic, economic, financial, and political fundaments that they’ll likely survive on their own merits. But for every relationship that looks solid, there are a half-dozen others that just don’t make much sense outside of the Cold War rubric.

A few specific calls on the countries that are not likely to make the cut:

  • South Korea is too exposed (and expensive to maintain) for the Americans to continue a deep relationship.
  • The United States has been fighting a war of zero strategic relevance in the Philippines for a half century (anyone remember Mindanao?); that’s pointless except as a hedge against China.
  • Egypt’s descent into impoverished, dysfunctional tyranny means that it no longer is a threat to anyone, much less nuclear-armed Israel.
  • Syria’s civil war eliminates Damascus as a concern, eliminating any rational for ongoing alignment with Jordan.
  • Relations with Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates have long been dominated by the concern of oil availability. Because of the shale revolution, the Americans only need that oil to fuel their alliance — an alliance that now is largely strategically irrelevant.
  • Subsidizing German, Polish, Baltic, and Romanian economic and physical security only makes sense if the United States wants to risk a ground war with an increasingly insecure (and yet still nuclear-armed) Russia.
  • Pakistan is nothing more than a giant pain in the ass.

What’s coming can only be described as the opposite of a global order — a Disorder.

Want to know more about what that looks like? Our next book — The Absent Superpower: The Shale Revolution and a World Without America — went to the printer today. It should be available in about two weeks. : )