Environment & Energy

hatrack

(59,592 posts) Mon May 7, 2018, 08:39 AM May 2018

Shale Oil Industry Has Lost A Quarter-Trillion More Than It's Made In Past 10 Years

The U.S. shale oil industry hailed as a “revolution” has burned through a quarter trillion dollars more than it has brought in over the last decade. It has been a money-losing endeavor of epic proportions.

EDIT

To understand why JP Morgan and the rest of these banks would loan money to shale companies that continue to lose it, it's important to understand the gambling concept of “the vigorish,” or the vig. Merriam-Webster defines vigorish as “a charge taken (as by a bookie or a gambling house) on bets.”

Wall Street makes money by taking a cut of other people’s money. To a gambling house, it doesn't matter if everyone else is making money or losing it, as long as the house gets its cut (the vig) — or as it's known in the financial world — fees. Understanding this concept gives insight into why investors have lent a quarter trillion dollars to the shale industry, which has burned through it. If you take the vig on a quarter trillion dollars, you have a big pile of cash. And while those oil companies may all go bankrupt, Wall Street never gives back the vig.

Trent Stedman of the investment firm Columbia Pacific Advisors LLC explained to The Wall Street Journal at the end of 2017 why shale producers would keep drilling more oil even when the companies are bleeding money on every barrel produced: “Some would say, ‘We know it’s bad economics, but it’s what The Street wants.'” And “The Street” generally gets what it wants, even when it is clear that loaning money to shale companies that have been losing money for a decade and are already deep in debt is “bad economics.” But Wall Street bonuses are based on how many “fees” an employee can bring to the bank. More fees mean a bigger bonus. And loans — even ones that are clearly bad economics — mean a lot more fees.

EDIT

https://www.desmogblog.com/2018/05/04/wall-street-shale-oil-fracking-revolution-losing-billions-continental-resources

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Shale Oil Industry Has Lost A Quarter-Trillion More Than It's Made In Past 10 Years (Original Post) hatrack May 2018 OP

Strange how an industry can despoil the environment AND lose money at the same time. enough May 2018 #1

This is a badly incomplete analysis FBaggins May 2018 #2

enough

(13,262 posts)

1. Strange how an industry can despoil the environment AND lose money at the same time.

Reply to hatrack (Original post)

Mon May 7, 2018, 08:44 AM

May 2018

The miracle of modern finance.

FBaggins

(26,757 posts)

2. This is a badly incomplete analysis

Reply to hatrack (Original post)

Tue May 8, 2018, 01:54 PM

May 2018

First of all... you can't compare capital expenditures over a decade (actually primarily the last five years or so) to the amount of income produced by them during that time. That's almost as nonsensical as buying a home and then comparing the amount of rent that you saved in the first five years. The asset is still there and still producing (and no... it isn't a big deal that individual wells have steeper depletion curves than traditional wells).

Second - the US consumes about 20 million barrels of oil per day. Before fracking knocked OPEC out of the driver's seat on oil prices...we were paying $120-$150/bbl - which means that during this period that they were losing the most money, they were saving consumers about twice that amount every single year. Even with prices back over $60/bbl, that's a savings of over four tenths of a trillion dollars per year. You're going to have a tough time convincing me to shed a tear over some oil infrastructure investor who lost money on an investment when I now pay $1.25 for milk that cost me over $4 just a few years ago. The total economic benefit of that expenditure is many times larger than the price tag.

THird - US oil production has essentially doubled during that period while peak oil true believers like the author here were insisting that it couldn't happen. That $280Billion facilitated about 6 million bpd of extra production (currently about $130 Billion per year) with every reason to believe that additional supply is still coming. Those who tout the rapid decline of production from fracked wells should also understand that many billions of dollars of that expended capital went to many thousands of wells that were drilled, but then caped without producing anything because current prices were too low. With higher prices, that's extra production that doesn't cost much of anything at all (because it was already paid for).

Lastly - There's nothing particularly new about this. The oil industry has gone through several boom/bust cycles. There's nothing there that higher oil prices doesn't fix quickly. Some firms go bankrupt and others buy up their assets for pennies. Then prices recover and the remaining companies make ridiculously high levels of profits (which are needed in order to cushion the next bust).

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