I have maintained for the past six years that a key goal of OPEC has been to so demoralize investors in shale oil that they stop sending money to the companies that drill for it. As I’ve written previously, I believe that OPEC’s contest with the shale oil industry is “part of a broader strategy meant to maximize Saudi revenues as production in the kingdom hovers at an all-time high over the next decade before beginning a decline.” It now appears that OPEC may have finally won its war against shale.
Investment in shale oil companies has finally collapsed—even as oil prices levitate. It has been a long time coming. The industry would like you to believe that it is now showing “restraint” in its capital spending. But, to use a dieting analogy, there is a big difference between watching what you eat and having your jaw wired shut—involuntarily in this case. The industry has experienced the equivalent of the latter in the capital markets.
What has amazed all of us who watched this battle play out is that OPEC didn’t win sooner. The relentless tolerance for losses among investors was beyond belief. And, when those investors returned in force after a brief vacation during the oil price bust in 2015, we skeptics grew concerned that rational thought had been eliminated from the universe.
Why did we think that? Because by that time the industry had already burned through hundreds of billions of investors’ dollars, dollars that merely subsidized petroleum consumers while enriching industry insiders. I am reminded of the joke about the business owner who explained that while he loses 5 cents on every sale, he makes it up in volume. Free cash flow numbers for the industry as a whole made it absolutely obvious that shale oil had been a money-loser for years. Why couldn’t investors see something that obvious?
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