If you wanna get around, if you wanna drive a car,
you wanna get on a plane, you need oil. It has been the foundation
of the 20th century economy. Once considered impossible, American energy independence
has become a reality. And for better or for worse, it's all thanks to fracking. The spoils of which have spurred what's commonly called the Shale Revolution. It is almost impossible to overstate the transformational
effect that fracking had on US oil and natural gas production. It became this rallying cry that the shale boom was
really gonna transform the US into a dominant energy player. It changed everything really. The US went from producing
about five million barrels of oil a day in 2008, up to 13 million barrels of
oil just this last March. It was this, what we thought at the time, was gonna be this great
American success story. Except for one problem. The numbers never added up. For every dollar they brought in, they'd be spending $1.10,
or $1.20, or $1.50. This has always been the
Achilles heel of the business. The oil sector always
needs to be very careful about the level of investment it makes and the cash returns to investors. The investment community did not finance the shale revolution out of
the goodness of their hearts, I think they liked the idea
of US energy independence, but they wanted returns,
and for the most part, they hadn't come. There has never been a better decade for growing US oil and gas production and yet what was the worst
performing sector in the S&P500? Energy. That tells you a lot about this sector. 26 US oil and gas producers have filed for bankruptcy this year. This is the story of how shale went from revolution to
a bottomless money pit. In order to understand how much shale changed the energy game, you have to go back a half century or so. For about 50 years, America has been way short of oil and gas, having to import these vital fossil fuels that are essential to the
running of the economy. And everyone believed
that we would be importing almost all our oil requirements
for the foreseeable future. And really that shaped American economics for a decade. You had the Arab oil embargo in the 70's, you've had wars, you've had recessions, all driven by shortages of oil and gas. From 1970 until 2000, the US imported most of its oil from Saudi Arabia and Russia. Companies like Exxon and Chevron were exploring drilling all over the world in places like the Arctic, and Africa. But fracking changed everything. When we talk about fracking, we basically talk about the combination of two technologies, horizontal drilling, and
hydraulic fracturing, and when they come together, it allows oil producers to get oil and gas out of very, very dense shale rock, very deep beneath the earth. And they really unlocked
huge, huge resources of oil and gas. It was briefly profitable as a gas game, but very quickly, the problem with any kind
of commodity industry is supply and demand, so natural gas fracking
unleashed such a plethora of supply, price plummeted and it's never recovered. After shooting itself in the foot by flooding the gas market,
the fracking business managed to pivot to oil. And what we find is that all
the lessons that were learned in natural gas could be
applied just as easily to deposits of oil,
because it's essentially the same process. A lot of people thought
this was hocus pocus, it was never gonna work, but
there were a few companies who decided to try it, just in case. Lo and behold, it worked. So, enormous amounts of
money flooded into the sector and you had lots of
companies took the money, and went out drilling. It was a perfect storm. Near zero interest rates
prompted by the financial crisis, mixed with the seemingly
endless demand for oil and gas at sky-high prices gave way
to a veritable feeding frenzy of hungry investors on Wall Street. This made it very easy for small, independent shale
companies to get started. You could really just lease up land and if you had partners, and you know, even just a small amount of investment, you could just try to figure
out where the good rock was. And that meant that sometimes you lost and sometimes you won, but when you won, you won big. For years, the big majors
didn't want anything to do with it, they stayed out of it. So it really was almost
like modern day wildcatting, and people made fortunes. Throughout American history, oil has always attracted
the rebellious type. And fracking was no different. Back then, and today, these
guys were called wildcatters. In the movies, you see those pictures of the rugged Texas oil
wildcatter standing in front of some spewing well. Wildcatter was basically someone who took what was considered like
a small amount of money at the time, and went out and leased
up a bunch of acreage and poked holes in the ground to try to figure out where the oil was. And no one personified the modern day shale wildcatter better
than Aubrey McClendon. We might have brought a way
for America and the world to be able to increasingly say no to OPEC. Aubrey McClendon was the founder and CEO of a company called Chesapeake Energy. He's a fascinating character,
just larger than life. He was one of the first to appreciate the scale of
American shale gas reserves. If there's an old maxim
in the oil business, drill baby, drill! Drill baby, drill! Drill baby, drill!
Drill baby, drill! That was Aubrey to a tee. If you gave him money, if he had access to money, any money, no matter how hard he had
to scrounge to find it, he was gonna go drill a well. With McClendon as shale's mascot, companies like Chesapeake
and a slew of other startups rode a wave of glory, and shale was hailed as the next great American success story. So 2010 to 2014 were really
the glory days of shale. This is when you had
everything going right. You had oil prices at $100 a barrel, you had Wall Street throwing
money at these companies, you had exploration being very successful, finding all these new areas, all these new basins. The idea that you could take something that was in your own backyard and make your country
this big global player is really a romantic one,
and I think a lot of people believed in that. And so the oil flowed. Lots of it. So much that America's
standing actually reversed from a net importer to
a net exporter of oil. And for the wildcatters
and consumers alike, it was a remarkable transformation. But what no one seemed to want to admit is that shale extraction
is incredibly expensive. And a shale well is very different from a traditional oil well. With a conventional well, once you've drilled it,
if you're lucky enough to hit natural gas, or oil, the well generally continues to produce for a long, long time. Shale wells by nature,
explode in this like spew of production, and it's like
if you take a champagne bottle and you shake it, you're gonna
get bubbles flowing over. But the decline that happens after that initial burst of production, you can see a shale well
lose 70 percent of production after its first year. I mean, it's pretty staggering. As a shale producer,
you're constantly fighting this enormous decline rate. You need to constantly be
drilling new wells, new wells, new wells, new wells, which
is more money, more money, more money. If you think about the
mindset of dot com companies back in the day, it was get market share, just grow, grow, grow, claim the market, then it's all yours,
then you're gonna be able to produce profits. And Aubrey McClendon's mindset
and the mindset of many in the shale industry
was much the same way. And while investors kept
pouring in new money, shale executives were
raking in huge salaries, even as their companies were sinking. Executives were paid based
on production growth, not on profits, and if
you reward an executive to grow, then grow is
what they're going to do. Tell an oil guy that not
only does he have money to go drill, but you're gonna pay him if he can go and produce more oil, he's gonna go produce all
the oil he possibly can. You can't slow down, or
your company shrinks, but if you keep growing, you're just constantly
putting cash in the ground to drill new wells and eventually investors are gonna say, "Wait a second, I need
you to stop drilling wells "if you're not gonna be able
to give me my money back." Over the last decade, an estimated $340 billion dollars has been spent on US fracking. It's what everyone refers
to as the treadmill. The problem, of course, is
when the treadmill stops, or when you are forced
to get off the treadmill. How low could oil go? It's been referred to as the Thanksgiving Day massacre. There is going concern
amongst some members of OPEC that shale was eating their lunch. Because you had this enormous
growth in the sector. Saudi Arabia, that is
taking the bigger picture, to protect the oil price,
we have to not cut, because otherwise shale
oil will get the advantage. The entire shale business model was predicated on high oil prices. Any serious drop and it
all comes crashing down. Who's winning? Consumers. Who's losing? Well obviously producers,
but maybe people who've lent to producers need to be
a little bit more worried than perhaps they have been. US frackers who had been promising they could make money,
suddenly it was clear they couldn't make money. And the capital going into the
industry started to dry up. While over 100 companies
ended up declaring bankruptcy. And people said the
shale revolution is over. But since when has a slew of bankruptcies and a highly volatile market
stopped any self-respecting entrepreneur? There was still a lot of people willing to invest billions of dollars in shale. A big reason why investors
remained interested in shale was the rediscovery
of a huge reserve in Texas called the Permian Basin. The hype around this region
became known as Permania. And so even though
there was this downturn, the music really didn't stop playing. Guys like Aubrey McClendon used permania to continually
sell the shale story, even as the price per
barrel made the model totally unsustainable. And fighting back the cloud over shale was gonna prove as futile
as trying to change the direction of the wind. The reckoning came in 2016,
with McClendon's death. The Oklahoma City Police
Department responded to a fatality accident
involving Mr. Aubrey McClendon. The government had been investigating him on price fixing charges, and they indicted him
in the spring of 2016, and the day after he was indicted, he went out in his SUV and
hit a bridge at top speed, and was killed. His death was almost
like the punctuation mark underscoring what was supposedly the end of the shale revolution, but it came back! And the main reason it came back is because we were still in
this super low interest rate environment. Investors didn't have anywhere
else to put their money, and so it came roaring back. Oil prices continued to rise steadily, and shale execs drilled harder than ever, praying for increasing oil prices and promising returns
to anxious investors. 2020 was supposed to be the year where the top 20, 25 players
in the independent US oil industry were
supposed to, in aggregate, turn cash flow positive
for the first time. But, of course, that didn't happen. In March of 2020, Russia
triggered an oil war with Saudi Arabia, effectively killing an important OPEC deal,
cratering global oil prices. And as if that wasn't enough. The coronavirus pandemic
is triggering fears of a global recession. Crude oil drops below $30 a barrel. The impact on the oil is disproportionate. Oil prices crashed,
and everything changed. Within weeks, you started
seeing the impacts of the coronavirus and
the subsequent lockdowns having effect on oil demand. And unlike the last downturn, this one was really triggered
by a complete collapse in demand. Global demand for oil was already low, since governments imposed
widespread lockdowns, and airlines grounded flights
because of the disease. There were lots of passive investors, people who own oil futures,
but have zero interest in taking delivery of a
physical barrel of crude oil suddenly realizing that they
were gonna be on the hook for taking delivery of crude oil. I think what everyone will
remember for many years to come is the day oil prices fell
to negative $37 a barrel. Since then, oil prices have bounced back, but the shale wildcatters have not. Some of the quickest to
rise have already fallen, including McClendon's white
knight, Chesapeake Energy, which filed for bankruptcy
in June of 2020. Are we almost through
this bankruptcy cycle in the distressed oil and gas patch? We are not. For a lot of these guys, it
was going to happen anyway, and this really just accelerated it. The tally is still coming in, but the number of jobs lost due to the collapse in the shale business is going to be crushing. Fracking actually provided
some four million jobs in the decade since the financial crisis. It's a sudden demise, perhaps a hint of things to
come, for the beleaguered shale oil industry. Yet amidst this collapse, shale execs have been
taking home huge bonuses. Oil and gas executives have
typically made well over 100 percent of their target bonuses, even as their returns or stock performance has been in the negatives. Ban fracking now! And now that the bubble has burst, many environmentalists have
seized on these failures to make their case against shale. You actually have a
coming together, almost, of environmentalist and investors to say just keep the oil in the ground, because there is too much of it. Environmentalists were delighted by any reports that fracking
wasn't financially viable because it appeared to be
support for their claim that this industry needed to go away. The lack of profits in
the fracking industry means that it's all of us, it's taxpayers who are gonna be stuck
with the cleanup cost with what it's done to our water supply, with what it's done to our environment. The lure of American dominance in the energy sector remains strong and despite the shale revolution's
faulty business model, and unresolved environmental concerns, the powerful desire to
extract oceans of oil that lay beneath our feet
will likely never relent. Fracking has come back from
the dead several times. I wouldn't count the industry out, I don't know that we'll
ever see the heyday that we did in the last few years again, but I think it's too soon to say that fracking is going away.
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"markets spur innovation and are good forms to allocate resources". This disproves that false statement. If markets cared about efficiency we wouldn't have a lot of the industries we do today.