Frackin’ . . . Like the Doo-Dah Man

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Recent stories in the wonderful Wall Street Journal give us the happy news that (while receiving no coverage from the mainstream media, of course) the fracking revolution rolls on.

The first story reports that American crude oil exports are accelerating to new highs, rapidly approaching as much as Kuwait currently exports. Amazing. As of last month, we were exporting 1,984,000 barrels per day (BPD), an increase of nearly 500,000 BPD from the week before, and up an astounding 684,000 BPD in May. Considering that Kuwait ships about two million BPD, this is great news.

Admittedly, the US is still a net oil importer. But we import almost all the decreasing amount of foreign oil we need from our great ally Canada — our great ally, unless President Trump pulls out of NAFTA.

This exporting craze will only continue to build — if we don’t try to destroy our fracking industry, and allow it to flourish.

The reason for this surge in US crude oil exportation is that American crude is relatively cheap. In the week in which the record in exports was set, the US crude price was nearly $7 per barrel cheaper than the world standard. This is a new record low during the period since the 50-year-old ban on oil exports was lifted a couple of years ago, thanks to the much-maligned Congressman Paul Ryan.

In the irony that is the mother and father of all ironies, the second biggest buyer of America’s crude oil is our devoted enemy, China, which now takes about 180,000 BPD from us, up almost 900% from last year.

This exporting craze will only continue to build — if we don’t try to destroy our fracking industry, and allow it to flourish. All it needs is to be left alone in the free market. If so, it will guarantee that we never see $100 a barrel oil again ever. Here I must give Trump his props — he has allowed fracking to go unmolested.

What the frackers have shown is a profound and continuing ability to innovate and lower costs, in the face of an attempt by OPEC, that rent-seeking cesspool of corruption, to drive them out of business by lowering prices. But it was the OPEC companies that were driven to the wall.

This is just more of the daffy Malthusian “peak oil” thinking we’ve heard before.

The Wall Street Journal reports that one of the biggest natural gas fields from a decade ago, the Haynesville Shale field in Louisiana, has been reborn. Ten years ago it was productive, but five years ago it was nearly played out. Yet this field has come roaring back to life. The number of drilling rigs has tripled in the past year, and the current amount of natural gas is up by 17% in the same period.

What has allowed this resurrection of gas fields is “refracking” — the process of using more sand and extending the wells further. In fact, the US Geological Survey now estimates that the Haynesville, Louisiana and adjacent fields hold 300 trillion cubic feet of natural gas. That is a 430% increase over its 2010 estimate.

Helping the process is investor recognition that natural gas has a bright future. The US Department of Energy projects that over the next quarter of a century or so, use of natural gas will outstrip that of all other fossil fuels, especially coal. Cheniere Energy has a large liquefied natural gas (LNG) plant and export facility in Louisiana. Additional LNG plants are being built in Louisiana, Mississippi, Texas, and even Maryland.

Natural gas is the “feedstock” in many industries — petrochemicals, plastics, and fertilizers, to name the biggest. Nearly 80 petrochemical plants are being built in the Gulf Coast region alone, where they will result in jobs, and the continued resurrection of Dixieland.

The major hurdles are an apparent fall in innovation in the fracking industry, wariness among investors, and rising labor costs.

The WSJ notes that some “experts” are worried that the export market will siphon off so much natural gas that prices will rise, hurting manufacturers that are now ramping up. This is just more of the daffy Malthusian “peak oil” thinking we’ve heard before. We can simply increase production of natural gas from all over the US — from the Dakotas to Pennsylvania to Texas — to meet the demand. All the while good paying jobs will be created, and our adversaries (such as Iran, Russia, Saudi Arabia, Qatar, and Venezuela) will be kicked in their teeth.

When will the “experts” finally wake up and realize that in a free market there is no “peak” anything — least of all oil and natural gas?

In fact, during the past year, Castleton Commodities International spent more than a billion bucks to buy 160,000 acres of Anadarko’s Haynesville land. For that it got an infusion of capital from Tokyo Gas America, the largest utility in Japan. This shows the true expert assessment of fracking’s value.

A third WSJ article amplifies the idea that the glut of US production is spooking producers. In other words, it’s such a bitch that prices are set by supply and demand! The piece notes that the growth in the number of rigs — typically used as a measure of future activity &‐ dropped from 20% for the preceding four quarters to “only” 6% in the third quarter of this year.

Many of the OPEC states (especially Saudi Arabia) need oil to be around $100 per barrel to keep their economies stable and their citizens quiet.

This shouldn’t cause any pain. With the buildout of American industry and the roaring appetite of East Asian consumers, demand will just keep increasing. The Journal notes that US oil production may surpass the supposed “peak oil” production of 9.6 million BPD set in 1970. The major hurdles are an apparent fall in innovation in the fracking industry, wariness among investors, and rising labor costs. But despite the slowdown in the increase of production, there is no decrease in production, and the Energy Information Agency expects American oil production to hit 9.69 million BPD at the end of the year. This, despite oil prices stuck at about $50 per barrel.

The last WSJ story that I want to mention points to the continuing geopolitical fallout from the growth of US oil production. It reports that continued low prices on world oil markets have led Saudi Arabia, Venezuela, and other OPEC members to push Russia — which, while not technically an OPEC member, is surely a fellow traveler — to continue to agree to the current limits on production.

The narrative here is as simple as it is delicious. In the face of the American fracking revolution — which dropped world oil prices from over $100 per barrel a few years ago to $50 and below — OPEC has tried to figure out what to do. Many of the OPEC states (especially Saudi Arabia) need oil to be around $100 per barrel to keep their economies stable and their citizens quiet. But Putin’s regime has used Russia’s oil wealth for a huge military buildup, and kept Russian citizens happy by using military power to conquer the Crimea and threaten the rest of the former Soviet empire. To keep this up, Putin is prepared to sell as much oil as possible, even at lower prices, to fund his mechanisms of corruption.

In 2017 Russia agreed with the OPEC strategy to cut back production by 2% to keep prices from plummeting further. While this production cut helped raise the world price of oil by about 13%, American fracking has kept the world price well below $60 per barrel. But Russia’s participation in continuing the cuts is unclear, to say the least. The current agreement ends in March 2018, and OPEC is pushing the wily Putin to agree to extend it. The Saudis are offering to set up a billion-dollar fund to invest in energy projects.

The US should open all the spigots and end net importation of foreign oil once and for all.

Putin so far remains noncommittal. He can see what is obvious, which the WSJ article notes: if OPEC succeeds in raising prices, American shale companies can immediately crank up their output, rapidly driving the price back down.

Now, whether the Russians are bluffing OPEC to get more concessions, or simply intend to cover their drop in revenue by increasing their own production, we will have to wait to see. But I think the US should open all the spigots and end net importation of foreign oil once and for all. The US should make our own oil a major export. This means: opening up more federal land for fracking and offshore drilling, opening up ANWR in Alaska, opening the East Coast for offshore drilling, and pushing to open up the Arctic for the rapid exploitation of the region’s resources.

I would suggest to Trump that he get over his fears about free trade agreements and cut a deal that would allow him to sign the TPP agreement, but with one new provision: the TPP members should agree that if the US can sell them oil and LNG at world market prices, they will buy from us. That would eliminate the trade imbalances that so anger Trump (though not economists, of course). It is, alas, very doubtful that Trump can grow that much in strategic thinking.

that the export market will siphon off so much natural gas that prices will rise, hurting manufacturers that are now ramping up. This is just more of the daffy Malthusian ‐




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Comments

Visitor

There is a small typo: As of last month, we were exporting 1,984 million barrels per day (BPD). That comma needs to be a decimal point.

and up an astounding 684 million BPD in May. I believe this should be 684,000.

Excellent point regarding the geopolitical impact of the US production. No wonder OPEC members are financing anti-fracking movies.

My only regret is that you didn't quote the Democrats who spent years repeating "You cannot drill your way out of high oil prices." Oops, looks like we just did. It's called engineering.

Gary Jason

Thanks, dear visitor, for reading my piece, and correcting the typos.

You are exactly right: get government out of the way of entrepreneurs and engineers, and there will be no energy crisis.

Best regards--Gary Jason

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