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US Shale Oil Revolution

A News Feature

Shale against prices

December 10, 2014 -- By John Kingston in New York

This time, it's different.

It's an old phrase, one that can be dragged out in all sorts of situations. It's also wrong a lot.

So the question as 2014 comes to a close is whether the recent precipitous decline in the price of oil and oil products is just a short-term decline, soon to be reversed as the world bounces back to a more solid $100/b future, or whether this is the end of a commodity super cycle that - with a few up and down aberrations - lifted the price of oil from an inflation-adjusted all-time low in early 1999 to that $100-plus level in the first half of this year, with an even bigger spike a few years ago.

It was at a meeting of the US chapter of the International Association for Energy Economics in 1999, a few months after oil had started to climb, that I first heard the declarations: we are at the start of a "super cycle" in oil markets, and maybe broader commodity markets, and it may run for 15 years.

Do the math: the 15 years is up.

Shale against prices

Analysis continues below...

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Break points

So let's assume that cycle is over. If so, it's been a wild ride.

In early 1999, the price of oil hit its lowest inflation-adjusted level ever and The Economist published a cover story in March that proclaimed the world was "Drowning In Oil."

Little did the magazine know the bottom had already been reached a month earlier.

It climbed steadily to its all-time high in July 2008, and plummeted on the back of the Great Recession. But by February 2009 the rise had resumed, peaking out earlier this year.

Precisely when the cycle ended - if it did - is not necessarily easy to determine.

In a speech given at Platts' Benposium conference in June, Peter Tertzakian of Arc Financial walked through his view of the way these cycles work. What are key are "break points," which he said come about only once every few generations.

Tertzakian saw a break point in that July 2008 peak, because it accelerated a trend toward lower demand.

That's not enough to reverse all the trends contributing to the busting of a 15-year cycle.

There are other break points needed - or more specifically, what Tertzakian called "magic bullets" - and the biggest one is obvious: the boom in unconventional drilling.

But it isn't enough to simply declare that it's all related to soaring US and Canadian production, and that's that.

The type of trends that Tertzakian talks about - "the industry does not roll over, it innovates," Tertzakian said at Benposium - can be seen in the Baker Hughes rig count.

According to Baker Hughes' worldwide rig count, rigs operating in the US in October 2011 stood at a little over 2,000.

Three years later, it was a bit more than 1,900, and production of natural gas and all petroleum liquids - crude, LPG and condensate - had surged.

The "break point" was not just the unconventional drilling methods, but the endless innovation that the industry kept bringing to the sector, getting more production out of a smaller number of rigs.

It wasn't easy. As Tertzakian noted, "it took a five-fold increase in the price of oil to make this change."

Actually, when we look back on the 1999-2014 oil super cycle, we see a lot bigger rise than that.

Platts' Dated Brent assessment bottomed out at $9.62-$9.66 on February 9, 1999.

When it hit its 2008 peak on July 3, 2008, it stood at $144.21-$144.23, and had risen by a factor of almost 15.

Even if you throw out the craziness leading up to the July 2008 peak and its subsequent breathtaking fall, and instead look at a more sustained rise, Brent peaked out in May of this year at about $115, an increase of about 12 times the 1999 low.

Next article: New commodity super cycle

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