In 1956, the American geologist Marion King Hubbert predicted that the US oil production would follow a “bell-shaped” curve, starting an irreversible decline around 1970. He was basically correct, but, around 2010, the production curve restarted growing. This abrupt rebound was an amazing event that propelled the US back to the role of largest world producer of crude oil, and to become noticeably more bullish in geopolitical terms. Buoyed by its large oil production, the Empire is striking back. But for how long?
James Schlesinger noted that human beings have only two operational modes: complacency and panic. It is an observation that rings true and that we can generalize in terms of groups: some humans are catastrophists, and some are cornucopians. Much of the current debate is about whether the economy can continue growing, as it has been doing for a few centuries, or it is condemned to start a decline that could be very rapid (the “Seneca Cliff”).
I tend to side with the catastrophists and I was the one who created the term “Seneca Effect” or “Seneca Cliff” to define the rapid decline that comes after growth stops. Indeed, catastrophes are a common occurrence in human history, but it is also true that sometimes (rarely) a catastrophic decline can be reversed: I termed this effect the “Seneca Rebound.
There is a truly impressive example of rebound with the story of the US oil production. You probably know how, in 1956, Marion King Hubbert proposed his idea of the “bell-shaped” curve. He turned out to be approximately right in his prediction and the US oil production started to decline after 1970 in a trajectory that seemed to be irreversible. After nearly 40 years of decline, in the early 2000s, no geologist sane in his/her mind would bet that the decline could be stopped, to say nothing about reversing it. It was not a question of being catastrophist or cornucopian: the members of both categories would normally agree that extracting oil from shales was simply unthinkable in economic terms. Fracking was not really a new technology, it had been developed in the 1930s, yes, it could help, but it was complicated and expensive. No one would engage with that on a large scale.
And then, something happened that changed everything. It took a few years before the new trend was clear, but by the mid 2010s, it couldn’t be ignored anymore. By 2018, the US production had returned to the levels of its 1970 peak. In 2019, it had overcome it, and it kept growing. The production of natural gas followed the same trend, shooting up rapidly to level never seen before. The Covid crisis caused a new drop, by now partially recovered. But, let’s forget he Covid story, for now. What happened that changed things so much in the US oil industry?
You probably know that the cause has a name and a story: it is called tight oil, or “shale oil” extracted by “fracking”. It itself, it is nothing especially new, the concept was already known in the 1930s. The idea is to use high pressure to fracture the rock that contains the oil, the kind called “shales.” That makes it possible for the liquid to flow to the surface. The problem with fracking is that it is expensive. So much that it is commonly said that nobody really made any money on it
. In 2017, an analysis by the Wall Street Journal
arrived at the conclusion that, since 2007, “energy companies have spent $280 billion more than they generated from operations on shale investments.” Other analysts arrived at the same conclusion: you can extract oil from shales, but don’t expect to make any money out of it. So, why are people insisting on pouring good money into bad wells?
There are good reasons. Very good reasons. What led the predictions astray was not that the geologists were not good at their job. They were, but they didn’t consider that the “market” is an abstraction that doesn’t always work, actually, almost never works. So, those financial entities that provide money for oil exploration are part of a mix of interests that include the oil industry, the aerospace industry, and the military industry. This mix is what keeps the US economy alive. But there would be no aerospace, nor military industries if the oil industry were unable to produce enough oil.
It is impossible to say how the decision to pour immense amounts of money into tight oil was taken. Maybe it was a strategic decision taken by the military lobby in the US government ((and you may also note something curious: why was the US the only state that invested in shale oil extraction, whereas nobody else in the world did? I can think of an explanation, but I leave it to readers to harp on conspiracy theories.) Or maybe the financial lobby recognized that they could survive losses in their investments in oil if these investments kept other sectors of the economy able to generate profits. Or, perhaps, it was a collective decision created by the great panic of 2008, when oil prices had spiked up to 150 dollars per barrel. That event scared everyone and convinced the key players that investing in oil was a good idea. In any case, with the second decade of the 21st century, the world changed
The image above is by Michael Crawshaw — it is not updated to the latest jump forward in oil production, but it shows how the US dominated the oil market (and the world), up to the 1970s. For a while, it was challenged by Russia and Saudi Arabia, but now it is taking the lead again. As all complex systems, the American Empire can maintain its stability, or increase its size, only as long as it can maintain a steady/increasing inflow of energy from outside. So, it’s not surprising that the Empire is striking back!
Among the visible consequences of the return of the Empire is that it abandoned Afghanistan
, that it had invaded 20 years ago in search of new oil resources in Central Asia. The US didn’t need those resources anymore and could concentrate on juicier targets, moving aggressively to push its main competitor, Russia, out of the European gas market
. The US is also aggressively pushing China, which it correctly considers its main long-term competitor. Whether this will lead to a war, is all to be seen. But it is energy that makes wars possible.
But for how long will the bonanza last? As always, the future is obscure, but not completely. Shale oil remains a limited resource, no matter how often we hear that it will give us centuries of prosperity, or even that technology made it unlimited
. After the Covid tsunami, shale oil production restarted to grow, but it has not yet reached the level it had in 2019. Also, its growth is clearly slowing down.
Is tight oil going to peak again and, this time, forever? We cannot say. We can only say that the American Empire is following the ebb and flow of the resources that make it exist. Such is the power of energy and empires are but slaves to the forces that pervade the universe!
Originally appeared on The Seneca Effect