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Power, like the air we breathe and the water we drink, is essential to life.

It’s one of our basic needs.

And unlike money, you can’t just print power to turn on lights, drive cars, fly across the world, or receive hospital care.

But there’s an energy crisis unfolding globally. Recently, we’ve written about it in these pages. And we talked about how the rising global demand for energy is outpacing the supply.

Yet, any full energy transition from fossil fuels, or traditional energy sources, to renewables – or cleaner energy sources – will take years. Decades even. 

Meanwhile, we still rely on fossil fuels for most of our energy supply.

So today, I want to talk about a critical part of this sector: shale oil, and why it could be in decline – but not for the reasons you might think. I’ll also explain what this trend means for you, and how you can beat Wall Street in its own energy game.

Before I get into the story, let me explain what exactly shale oil is…

Shale Is Oil From Rock

Shale oil is a type of oil produced from fragments of oil shale rock. And oil shale rock is a sedimentary, underground rock that contains trapped petroleum.

A process called hydraulic fracking converts these fragments into synthetic oil and gas.

That process is nothing new. It was first used commercially in the U.S. in 1949. Before that, it was used during World War II. It involves forcing water mixed with sand and chemicals into a well. Then, it creates cracks in the shale rock so oil or gas trapped inside can escape.

The refined product was mostly used in transport fuels during World War II.

After that, it was used to produce industrial chemicals.

Then came a period called the “Shale Revolution.” That’s when the refined oil from shale was mainly used as a heating oil and marine fuel.

It’s also when the U.S. emphasized hydraulic fracking and horizontal drilling to increase its overall domestic oil and natural gas production.

At the time, this reduced America’s dependence on oil imports from countries like Saudi Arabia and Venezuela.

For instance, in 2005, the net imports of crude oil and products to the U.S. stood as high as 12.5 million barrels per day (BPD). By 2015, that number dropped by 62% to 4.7 million BPD.

And here’s what prompted the dramatic shift in production…

The Three Main Drivers of the American Shale Revolution

First, advancements in hydraulic fracking and horizontal drilling technology changed the shale oil industry.

It made it easier to extract shale oil from the formations in the rock.

Other than the technology itself, there were three main reasons for increased shale oil and gas production in the United States.

1. In other countries, governments own sub-surface mineral rights. But in the United States, the owner of the land owns the resources beneath it. That means fewer barriers to production for private companies. So the industry took advantage of this ability to source more oil during the financial crisis and recession.

2. The U.S. oil and gas industry has access to both federal subsidies and private capital. Plus, the regulatory permit process became very straightforward.

3. The U.S. benefits from an extensive infrastructure and pipeline network. So, it was able to quickly adapt to increased shale oil production.

The Shale Revolution made the U.S. the world’s top oil and gas producer. Have a look…

From 2008 to 2015, production of U.S. crude oil and natural gas liquids increased by an astounding 6 million BPD.

According to the U.S. Energy Information Administration (EIA), 2.84 billion barrels of crude oil per year are produced from tight-oil resources (or shale) in the United States.

In 2022, about 66% of total U.S. crude oil came from shale.

But this momentum might now be slowing down…

Who Killed the Shale Revolution?

These days, various oil field experts are saying the U.S. Shale Revolution is over.

One industry executive said Middle East producers are back in control of setting oil prices because shale production has declined.

For example, Hess Corp. CEO John Hess said, “Now, really OPEC is back in the driver’s seat where they are the swing producer.” 

He believes U.S. oil companies are too focused on paying dividends to shareholders. They are not investing enough in production growth.

Scott Sheffield, the chief executive of Pioneer Natural Resources, agreed. He said, “The shale model definitely is no longer a swing producer.”

Even so, domestic oil production is near an all-time high. Plus, the U.S. is producing more than double the barrels of oil per day it produced in 2008.

You see, there’s no lack of available land for drilling or hydraulic fracking. The U.S. oil and gas industry holds more than 9,000 approved – but unused – drilling permits.

Nearly 5,000 of those permits were approved in 2021 alone – under the Biden administration. That’s the highest approval number since the second Bush administration.

So you may be wondering why experts are calling it the end of the Shale Revolution.

If you guessed politics, you’d only be partially right.

One big reason is Wall Street.

Wall Street wants oil companies to keep share prices high. So they indirectly want oil prices to remain high.

And that requires oil companies to open up fewer new oil or shale oil sources.

According to Bloomberg:

U.S. oil companies generally have been reluctant to pump more, preferring to steer cash flows back to investors instead of spending it on new drilling that could flood the world with cheap crude.

In other words, they are pouring billions of dollars into dividends and share buybacks.

And they’ve had record profits to do that with.

In 2022, the five major global oil companies – Shell, Chevron, BP, ExxonMobil, and TotalEnergies – posted record profits, totaling nearly $200 billion. That figure is 50% higher than the prior record from a decade ago.

Higher oil prices drove those extra profits following the Russian invasion of Ukraine. In 2022, the energy sector outperformed other market sectors. And the top 10 performers in the S&P 500 Index were all energy companies.

Now, oil prices have dropped since – on fears of a more general economic slowdown. But the possibility of intensified geopolitical turmoil anywhere, or events such as OPEC reducing supply, could again cause spikes in oil prices.

Meanwhile, big oil companies pledged sizeable buyback programs. Chevron announced a $75 buyback program in January. Exxon’s is set to be $35 billion over the next two years.

Instead of spending on new projects and developments, these companies are focused on using their capital to lift stock prices.

When corporations throw cash at their own shares, that extra demand tends to push share prices up. The big oil firms look better to shareholders by diverting cash to shares rather than into longer-term shale production initiatives.

It goes back to basic supply and demand. The higher the supply of oil, the lower the price of oil will be. And the lower the price of oil, the less profitable these oil companies are.

Chevron CVX and Exxon’s XOM share buyback initiatives set the tone for the entire industry. That’s because Chevron is the largest shale oil producer in the U.S. ExxonMobil is the fifth largest.

You can see that in the chart below:

So right now, the biggest names in the oil and gas industry are busy raking up their profits. Meanwhile, total oil and gas spending on development has fallen in real terms.

With oil prices heading higher in the past year, this spells more volatility in the energy sector…

How to Beat Wall Street in the Energy Game

The United States – and the world – can’t print or drill its way out of oil price volatility.

Energy prices remain unstable. That’s because they cannot be set by just one country. They are part of a global market influenced by exports, imports, politics, Wall Street trading activity, and corporate choices to prioritize shareholders.

That’s why the only path to true energy independence involves fortifying existing energy sources and expanding new sources.

It’s also why my team and I have been set on finding a solution to the current energy crisis taking place today. In fact, I’ve turned my attention to an emerging trend in the world of energy. It’s a new form of fuel in a subsector called “SMR.”

And a recent energy law – Bill S.1111 – could unleash a $4 trillion torrent into the SMR sector.

The best part is, both sides of Congress are embracing this technology. That’s because it could be the answer to America’s – and the world’s – energy problems.

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