Why the Oil and Gas Industry Will Never Be the Same

By MARSHALL AUERBACK. Progressive Populist, June 1, 2020

Upheavals in the oil market are flipping the world on its head and again proving that rational industrial policy is a better guidance.

For years, the US shale patch has been sustained by Wall Street-driven Ponzi financing, in which drilling and production for natural gas have not generated cash flows that come even close to offsetting costs of the debt service. The latest collapse should finally constitute the death-knell for this sector, even as the president and the GOP in particular (which largely represents American oil-producing states) scramble to provide funding to the sector. Storage capacity will take several months to build up and, at a time of increasingly fraught relations between the United States and China, the latter is hardly likely to do US oil producers any favors, particularly when there are ample other (geopolitically friendlier) sources of crude in other parts of the world, which are also far cheaper.

Even if there weren’t a coronavirus pandemic, it would still be a peculiar moment for the global energy market, where many conditions are rapidly changing. The debt-fueled shale oil bonanza has hitherto enabled the US to flood world supply and weaken the revenues of perceived geopolitical rivals. That leverage is now gone. Furthermore, as John Dizard of the Financial Times has observed, “Asian LNG prices have collapsed much faster than US prices. That means it no longer pays to chill American natural gas, load it on to LNG tankers, ship it across the Pacific, and re-gasify it. So US LNG exports are ex-growth.” That shifts the balance of geopolitical power in the energy markets in the near and mid-term back to countries like Russia and Tajikistan, as they are likely to re-establish a pipeline primacy that it looked like they had lost.

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