In 2006, long before the shale fueled feeding frenzy, I saw a presentation by a representative of an oil major. He said that if the oil price goes above USD 55 for a period of more than 18 months at a time, serious demand destruction would occur. The oil price was above USD 55 for quite a bit longer than 18 months and demand has steadily risen but let’s go one step deeper. What if the rise in oil demand is at least in part due to all those stimulus packages that central banks worldwide used to reanimate their economies? What if Chinas growth does not exist anymore for real and what we see is a giant bubble? What if shale becomes ever more competitive while the OPEC+ nations slug it out on frontier oil? If we are living on the surface of an empty Mac Donalds burger wrap we call our economies, the great crunch is still before us. We have given shale a lifeline by throwing more than 10 years of R&D money at it while the economy should have shrunk to heal and now the monster is in shape for the crunch. Crazy – compared to what reality has dealt us over the last 10 years, crazy is a word that should be used sparingly.
A form of cognitive dissonance seems to be taking over oil market watchers, a sort of a blind belief that US shale oil production is set to grow, and grow at an aggressive rate, indefinitely. This erroneous belief seems to be the underlying cause for much of the pessimism as to the oil price outlook over the coming years. While, it is undeniable that US shale growth over the last several years has been nothing short of phenomenal, the US shale industry geological and financial resources are not infinite.