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Americas Path To Energy Independence: The Shale Revolution

Simon Lack, Forbes

America is likely to be the world’s biggest oil producer by the end of 2019.

In the history of American Energy Independence, September 29, 2016 was a significant day. OPEC was two years into a strategy to bankrupt the U.S. shale industry, by allowing prices to drop to unprofitable levels. The Shale Revolution had led to increasing U.S. output, such that by 2014 the cartel led by Saudi Arabia and Russia concluded that the continued loss of market share had to stop. Believing that the new U.S. supply was high cost, they expected a couple of years of ruinously low prices would drive these new producers out of business, allowing OPEC to subsequently profit as U.S. output slowed.

It turned out to be a colossal miscalculation, which led to the spectacular triumph of American free-market capitalism over 40% of the world’s oil output. The U.S. shale industry responded to the existential threat by innovating, cutting costs and becoming ruthlessly efficient. It was the only way they were to survive. They drilled deeper, and longer. They adopted multi-pad wells, which were vastly more productive. They crunched enormous amounts of data to refine their techniques, and made substantial IT investments. As a result, U.S. output dipped but didn’t collapse.

Most OPEC nations ran substantial government deficits as their oil revenues slumped, and by late September 2016 they’d had enough. A new strategy of higher prices supported by production limits was adopted, conceding a permanent role for U.S. shale producers. As prices rose again so did U.S. output, and America is now likely to be the world’s biggest oil producer by the end of 2019.

U.S. Energy Administration (EIA)

In 2016 OPEC Switches Strategies and U.S. Output Recovers

Many people are surprised to learn that horizontal drilling and hydraulic fracturing (“fracking”) are almost exclusively found in America. While the porous rock holding oil and gas can be found in many parts of the world, the U.S. Shale Revolution required more than geology.

Fracking requires large amounts of accessible water, which is forced into the rock at high pressure so as to form countless tiny cracks. Sand mixed in with the water props these cracks open so oil and gas can flow out.

The U.S. already has an existing energy industry with a highly skilled labor force and an extensive midstream infrastructure network. Access to capital comes from the world’s biggest financial markets.

A culture of entrepreneurialism and new business formation exists in spades. Many of the success stories of the Shale Revolution are smaller independents who have left the integrated oil majors struggling to catch up.

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