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This is a complete house of cards, for multiple reasons. It's yet another boom that will result in a lot of hardship for people. First, all the fracking in Tex

This is a complete house of cards, for multiple reasons. It's yet another boom that will result in a lot of hardship for people. First, all the fracking in Texas is fueled by cheap interest rates and private equity. The industry as a whole is losing money -- to the tune of $600 billion since 2007. And when investors (I'm looking at you pension funds) finally realize that there is no path to making these companies profitable, especially when the decline rate on their wells is 70% in the first year, they will stop pouring money in. A lot of companies will vanish when this happens. Second, the media loves to play up the notion of "energy independence" and headlines of the United States producing more than Russia/Saudi Arabia, but neglects to understand the differentials in crude quality. The US (especially Texas) is producing light oil, which increasingly is not wanted in the industry. The refineries in the US have consumed all they can and are increasingly in need of heavier oil to mix with, hence why you see the US exporting our oil and importing oil from Saudi Arabia and elsewhere. When exports have been maxed out and foreign buyers slow their purchases these companies will have nowhere to send their oil and will need to slow drilling.

eloff 8y ago
I don't think things are quite as bad as you paint it, markets are not irrational and they really are not going to keep investing in a losing enterprise. As for the crude quality, this seems like an ideal synergy with heavy oil sourced from the Alberta tar sands, and yet another good reason for constructing the Kinder-Morgan pipeline to make importing it cheaper and more environmentally friendly. People will probably jump all over me for saying that - but the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. This is one of the few (only?) Obama-era decisions that Trump has rolled back where I actually think he did the right thing.
- thematt 8y ago
  True, there is a bit of hyperbole in my comments. It's certainly not a sub-prime mortgage type situation. But at the same time people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. When 70% of the asset you just invested in disappears in the first year, it's a vicious cycle to get out of. That difficulty gets compounded with the service companies like Schlumberger/Halliburton increasing their costs (32% in the last year) and interest rates creeping back up. The Canadian situation is unfortunate. Collectively, it represents so much lost revenue for them. Setting aside the environmental issues and inefficiencies with shipping by rail and truck, companies are having to sell their oil at a steep discount to what they could otherwise be getting.
  - woodandsteel 8y ago
    >people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. I find that highly improbable. They would have run out of cash long ago. Or if they were super-rich from money earned elsewhere, then they would be smart enough to not throw it away like that. Another key point you neglect is that the efficiency of fracking keeps improving, so it can turn a profit at ever lower prices.
    - thematt 8y ago
      Why do you find this improbable? It's easily verifiable. This is all public financial data we're talking about. Here are some sources to avoid having to crunch the data though: https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html https://www.nytimes.com/2018/09/01/opinion/the-next-financia... http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focused-companies/ http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focuse... The technology improvements (namely horizontal drilling) have just allowed the companies to suck more oil out faster. It hasn't changed the economics of it. Particularly because you're dealing with an expendable resource and to move on to the next well requires further capital investment. Here is a great (recent) podcast that discusses exactly what I'm talking about: https://www.bloomberg.com/news/audio/2018-12-13/bethany-mclean-discusses-the-fracking-industry-podcast https://www.bloomberg.com/news/audio/2018-12-13/bethany-mcle...
    - JanSt 8y ago
      thematt is absolutely right with everything he says. Without external funding pretty much all companies would not operate at all. Many did run out of cash in the last downturn. Those that survived did so by a) external funding (that can dry up quickly) - debt and equity offerings b) high-grading their drilling inventory, only drilling the very best locations, boasting efficiency-improvements (and collecting more money) c) real technical improvements that are far from enough to be cash-flow positive long term The efficiency is not improving as much as they make you think. It even declines when they stop drilling their best wells. They reduced their costs substantially in the downturn because they gobbled up fire-sale equiqment from bankrupt competitors, squeezed service margins etc. All that will be gone at some point. Interest rates rise. Best wells will be drilled. Acres in the permian are damn expensive now. Service companies need to raise prices. The 70%yoy decline rates are absolutely terrible. They will keep growing a few years, but after that they will have to drill so damn much in worse spots than now, that many will crash down quickly. Losing 70% of producing assets every year is just terrible and puts you to the full market forces. There is pretty much no way to stop drilling because that would decimate your company by 5-6% every month. So drill baby, drill!
- Al-Khwarizmi 8y ago
  > the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. I'm not sure if I get where you are coming from. Why not electric powered trains? (and in the near future electric cars, etc.)
  - eloff 8y ago
    Electric powered freight trains in the US don't exist (at least in general) they're all diesel-electric locomotives. But even if you solve that, it's not going to be as efficient or safe as a pipeline.
  - antidesitter 8y ago
    A pipeline is still safer and cheaper.
  - HillaryBriss 8y ago
    the argument is that such oil-bearing trains derail frequently enough that they actually spill more oil than the pipelines would
Scoundreller 8y ago
Well, there is a stable nearby country that wants to pay for and build a pipeline to carry some of the heaviest oil known to man, but somehow that isn’t flying.
ykevinator 8y ago
The worst part is that private companies make the profit while tax payers clean up the mess. Reverse socialism at its worst.
- Faaak 8y ago
  How will tax payers clean up the mess ? What do you mean by it ?
  - nradov 8y ago
    Many of the extraction companies will eventually go bankrupt and liquidate, leaving toxic waste sites behind. Then the government ( funded by taxpayers) will have to step in and clean up the mess.
- TomMckenny 8y ago
  It is a synthetic problem of the commons: they can incur expenses that someone else pays off. As you're hinting, it'd be trivial to shift the incentives via taxes, clean up liability etc. A similar problem exist with the petroleum economy vs climate change. And a third case is that the residents near the oil filed bear the burden while the benefits, both huge and trivial, are gained by individuals far away. Each of which would be addressed if the distribution of power were different.
- briandear 8y ago
  You profit. You pay far lower gas prices than in Europe for example. You also pay less for products. You benefit from cheap, plentiful oil, regardless of who “profits.”
  - Tade0 8y ago
    The fuel prices in Europe are like that mostly because of taxes. In e.g. Italy, where the taxation is especially heavy when oil prices halved gasoline went down 30% at best.
deleted 8y ago
[deleted]
stevenwoo 8y ago
I think the worst part is that fresh water is used for fracking fluid and the contaminated waste water is injected back into the earth, when we can look at the water usage rates and population and see a problem coming in fresh water supplies.

eloff 8y ago

I don't think things are quite as bad as you paint it, markets are not irrational and they really are not going to keep investing in a losing enterprise. As for the crude quality, this seems like an ideal synergy with heavy oil sourced from the Alberta tar sands, and yet another good reason for constructing the Kinder-Morgan pipeline to make importing it cheaper and more environmentally friendly. People will probably jump all over me for saying that - but the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. This is one of the few (only?) Obama-era decisions that Trump has rolled back where I actually think he did the right thing.

thematt 8y ago
True, there is a bit of hyperbole in my comments. It's certainly not a sub-prime mortgage type situation. But at the same time people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. When 70% of the asset you just invested in disappears in the first year, it's a vicious cycle to get out of. That difficulty gets compounded with the service companies like Schlumberger/Halliburton increasing their costs (32% in the last year) and interest rates creeping back up. The Canadian situation is unfortunate. Collectively, it represents so much lost revenue for them. Setting aside the environmental issues and inefficiencies with shipping by rail and truck, companies are having to sell their oil at a steep discount to what they could otherwise be getting.
- woodandsteel 8y ago
  >people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. I find that highly improbable. They would have run out of cash long ago. Or if they were super-rich from money earned elsewhere, then they would be smart enough to not throw it away like that. Another key point you neglect is that the efficiency of fracking keeps improving, so it can turn a profit at ever lower prices.
  - thematt 8y ago
    Why do you find this improbable? It's easily verifiable. This is all public financial data we're talking about. Here are some sources to avoid having to crunch the data though: https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html https://www.nytimes.com/2018/09/01/opinion/the-next-financia... http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focused-companies/ http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focuse... The technology improvements (namely horizontal drilling) have just allowed the companies to suck more oil out faster. It hasn't changed the economics of it. Particularly because you're dealing with an expendable resource and to move on to the next well requires further capital investment. Here is a great (recent) podcast that discusses exactly what I'm talking about: https://www.bloomberg.com/news/audio/2018-12-13/bethany-mclean-discusses-the-fracking-industry-podcast https://www.bloomberg.com/news/audio/2018-12-13/bethany-mcle...
  - JanSt 8y ago
    thematt is absolutely right with everything he says. Without external funding pretty much all companies would not operate at all. Many did run out of cash in the last downturn. Those that survived did so by a) external funding (that can dry up quickly) - debt and equity offerings b) high-grading their drilling inventory, only drilling the very best locations, boasting efficiency-improvements (and collecting more money) c) real technical improvements that are far from enough to be cash-flow positive long term The efficiency is not improving as much as they make you think. It even declines when they stop drilling their best wells. They reduced their costs substantially in the downturn because they gobbled up fire-sale equiqment from bankrupt competitors, squeezed service margins etc. All that will be gone at some point. Interest rates rise. Best wells will be drilled. Acres in the permian are damn expensive now. Service companies need to raise prices. The 70%yoy decline rates are absolutely terrible. They will keep growing a few years, but after that they will have to drill so damn much in worse spots than now, that many will crash down quickly. Losing 70% of producing assets every year is just terrible and puts you to the full market forces. There is pretty much no way to stop drilling because that would decimate your company by 5-6% every month. So drill baby, drill!
Al-Khwarizmi 8y ago
> the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. I'm not sure if I get where you are coming from. Why not electric powered trains? (and in the near future electric cars, etc.)
- eloff 8y ago
  Electric powered freight trains in the US don't exist (at least in general) they're all diesel-electric locomotives. But even if you solve that, it's not going to be as efficient or safe as a pipeline.
- antidesitter 8y ago
  A pipeline is still safer and cheaper.
- HillaryBriss 8y ago
  the argument is that such oil-bearing trains derail frequently enough that they actually spill more oil than the pipelines would

Scoundreller 8y ago

Well, there is a stable nearby country that wants to pay for and build a pipeline to carry some of the heaviest oil known to man, but somehow that isn’t flying.

ykevinator 8y ago

The worst part is that private companies make the profit while tax payers clean up the mess. Reverse socialism at its worst.

Faaak 8y ago
How will tax payers clean up the mess ? What do you mean by it ?
- nradov 8y ago
  Many of the extraction companies will eventually go bankrupt and liquidate, leaving toxic waste sites behind. Then the government ( funded by taxpayers) will have to step in and clean up the mess.
TomMckenny 8y ago
It is a synthetic problem of the commons: they can incur expenses that someone else pays off. As you're hinting, it'd be trivial to shift the incentives via taxes, clean up liability etc. A similar problem exist with the petroleum economy vs climate change. And a third case is that the residents near the oil filed bear the burden while the benefits, both huge and trivial, are gained by individuals far away. Each of which would be addressed if the distribution of power were different.
briandear 8y ago
You profit. You pay far lower gas prices than in Europe for example. You also pay less for products. You benefit from cheap, plentiful oil, regardless of who “profits.”
- Tade0 8y ago
  The fuel prices in Europe are like that mostly because of taxes. In e.g. Italy, where the taxation is especially heavy when oil prices halved gasoline went down 30% at best.

deleted 8y ago

[deleted]

stevenwoo 8y ago

I think the worst part is that fresh water is used for fracking fluid and the contaminated waste water is injected back into the earth, when we can look at the water usage rates and population and see a problem coming in fresh water supplies.