Bethany McLean: Saudi America

For years now we've been covering the false promise of the American shale oil "miracle".

Yes, it has extracted a lot more oil out of American soil that most thought possible. But at an economic loss. And at great environmental cost.

If the shale drilling companies can't make any profit, either when oil prices are high or low -- why are we still pursuing shale deposits so aggressively?

To shed further light on this paradox, this week we welcome journalist Bethany McLean to the program. McLean is editor-at-large at Fortune Magazine and a contributing editor for Vanity Fair and Slate magazines. She is also author of the excellent book: Saudi America: The Truth About Fracking And How It's Changing The World.

McLean warns that the hype, the hucksterism, and the geological shortcomings of the deposits themselves, are setting up both investors and American society for tremendous disappointment:

The real catalyst of the shale revolution was the Great Financial Crisis and the era of unprecedentedly-low interest rates that followed.

And that had two effects. One was that it made debt cheap. So these companies that are heavily dependent on being able to raise capital could raise debt at low prices. And without that, I’m not sure there would’ve been a shale revolution because they needed such immense amounts of capital to fund their drilling.

But it had a second impact, which is that when pension funds were no longer able to earn a return in traditional fixed income markets, they’ve increasingly put their money into riskier assets like hedge funds that invest in credit and private equity firms. Those entities, in turn, have increasingly invested in shale.

I got an estimate from one source that said 1/3 of the drilling, a third of the fracking, being done in the country today is being done by private equity-backed companies. So we’ve had this derivative effect of the era of low interest rates.

Now there’s a lot of money that believes believes the story that technological improvements are going to make this industry profitable in the long run. But there are lots of ways that private equity firms and other investors can make money even if the companies themselves don’t. And what I mean by that is that for a long time, a shale company that was publicly traded was valued not on its profits but rather, on a multiple of its production or its reserves.

And so, there's an incentive to take these companies public, where it can trade on its growth and production. It doesn't have to produce profits. You can flip your company to the public markets or sell it to an already-public company. So, it’s kind of a big game of musical chairs in many ways.

And I think there's an unacknowledged problem with the shale revolution that feeds into the lack of profits. And that’s that all wells are not created alike.

And so, that gets to the really core question here. How much really good acreage is there? And it’s a reason to believe that even though the industry did get closer to profitable in this last year, that may not last because a lot of companies were drilling the sweet spots first. They were drilling their best acreage. And the question is, “How much of that is there?” And to be frank, nobody really knows the answer.

Some of that is depending on technological changes. If you can get better technology that enables you to get more oil out of the ground more cheaply; then, something that wasn’t the sweet spot could become a sweet spot. Thus far, though, the evidence seems to be mounting that the picture is the opposite of that. And what I mean by that is Wall Street Journal did a really good piece in late December pointing out that actually, production levels are coming in way short of what companies had estimated.

So, it looks like the sweet spots, overall, aren’t even as sweet as they were forecast to be. It’s not coming in better than expected, it’s coming in shorter projections.

there’s a lot of this idea – the idea has shifted from America being energy-poor to America being resource-abundant. And you hear this idea of American energy independence and even President Trump talks about American energy dominance. And I think I read that the IEA – the International Energy Agency – is forecasting that most of the growth in global production in coming years is going to come from US shale. And as a result of that belief, a lot of the big, long-lived projects that take years of investment before they start to produce have been put on hold. So, that oil isn’t going to be coming online. And so, what happens if shale can’t deliver?

Click the play button below to listen to Chris' interview with Bethany McLean (38m:39s).

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This is a companion discussion topic for the original entry at

Chris said,

… the land below, it just looked so bizarre. It looked like a quilt. It was a checkerboard of scraped-off squares dotting the land just as far as the eye could see. Just grid-like precision.
Other areas lack the grid-like precision. The land looks as though it has contracted smallpox. Yes, this is how we exercise good stewardship. In Australia the Northern Territory is about to suffer the fracking plague. Exploratory drilling has just started. The Aboriginals are outraged. The damage will be immense. The governments don't care. Alternative sources of, say, diesel fuel, are available, but these don't fit the corporations' business models and the governments don't care.

After splitting and hauling in some more firewood to keep the temperature of the house above 15C, I sat down and had a chance to catch your interview with Bethany McLean. The information prompted the question above and the answer was obvious; our grandkids and great-grandkids. Having lived and worked in the Western Sedimentary basin for over 40 years, the general modus operandi in the oilpatch is get it while you can. Not unlike real estate, it’s not how much you make on each transaction, it’s how manying transaction you make that sets the priority. Whether it’s Aubrey McClendon, Warren Buffet, Charlie Munger, Donald Trump or who have you, they’ll tend to be found on the same end of the Bell curve; a flat narrow tail…
The oil patch isn’t appreciablely different than most male oriented success stories, as Bethany diligently notes. Agriculture isn’t much different (allbeit the margins are a lot tighter on a per acre basis)."If I can just make it through the next year or the next business cycle, I’ll be happy. Oh, and subsidies help. "Life, liberty and the pursuit of happiness is the common mantra of not only the US mentality, but of the the human condition in general.
I think I may have referenced one of John Maynard Keynes quotes in a past post (my apologies); “in the long term, we’re all going to be dead”! Chris is right, “the next 50 years is going to be completely different from the past.” Enjoy the ride and perpare your descendants! Counterfeiting may become a growth industry.
Interesting, but a somewhat cursory discussion, given the potential scope of the subject.Good job, guys!

I absolutely loved this interview. What struck me as surprising, however, was that Bethany seemed to be mostly unaware about our energy predicament and clinging on to the hope of technological change and energy substitution (now I'm getting a deja vu regarding some of my other most recent comments). I guess the problem is that as society becomes more and more specialized it's harder and harder to see the big picture, so even if you study the fracking situation in detail you may miss the bigger oil and gas story.
Speaking of experts, I would love if you guys could bring back Mark Cochrane to discuss the latest climate science, including the very disturbing recent study about stratocumulus cloud disappearance under high levels of CO2 that humanity may unfortunately trigger in the coming century. Even more points if you could torture him to take a look at the most recent musings of Guy McPherson, who has moved up his human extinction estimate from 2036 to 2027. Yes, Guy is an alarmist, pessimist and not exactly a climate scientist, but he still understands climate science better than I do and I'd love to see a real scientist go through Guy's latest logic.

In the 1980s, the US turned the oil spigots to full open, exploiting the Gulf and North Slope resources so fast that oil prices crashed and stayed there for quite a while. I think it’s fairly well recognized now that this was an intentional strategy designed to undercut the oil revenue going to the USSR. And it worked, with the USSR breaking up within the decade. Yes, there were other factors in the failure of the Soviet Union, but loss of oil revenue was a key reason that their economic instability increased to the point where the union failed (and – bonus! – Western interests could start to penetrate).
PP’ers have been speculating about fracking mostly within the realm of financial scammery and energy/environmental foolishness. It is certainly the latter and is probably the former – jeez, what ISN’T part of the Big Ponzi these days? But since US fracked oil came online, oil prices have been much lower, putting revenue pressure on Russia, Venezuala, and all the various OPEC client states the US tries to keep in line. Additinally, because oil is not nationalized in the US (and for multiple other reasons), low oil prices are more positive than negative for the US.
The big pile of free money created by the Fed after 2008 has made it easy to fund this fracking/geopolitical strategy. From the perspective of those plotting the continued global hegemony of the US, it probably was an easy call.
Now, the real question: What comes after this phase inevitably winds up? Not likely to be pretty.

An excellent podcast. She is an amazing guest, so if you can get her on the roster every few years, I think that’d be good. I’m going to go buy her book if fornonother reason than to support her coming onto the site. I also plan on using this podcast in my Econ classes, because it’s never a bad thing to show my girls that understanding economics isn’t beyond their ability as females.

just excellent!
“The U.N. says that, in order to avoid catastrophic levels of warming, we need a global mobilization at the level of World War II. We know, from history, we didn’t fight that war out of hope or optimism. It was out of fear and alarm.”