Sunday, September 22, 2013

The shale gas bubble: burning your home in order to save it

This is a written version of a comment that I made during the discussion at the last reunion of the Club of Rome in Ottawa.

Ladies and gentlemen, let me comment on a point of this interesting discussion. We have been told, correctly, that the production of shale gas in North America is booming and also that prices are now very low; around 2 dollars per million cubic feet. It is, actually, somewhat more than that but it is still a low price in comparison to what it was some years ago; before the shale gas "revolution"

On the other hand, producing shale gas is expensive. "Fracking" is a technology that was developed long ago, but it was never used on a large scale because it was too expensive in comparison to conventional gas production. And that's reasonable: for fracking you need sophisticated equipment, chemicals, and more. In addition, a shale gas well is rapidly exhausted, so that you must go on drilling in order to keep producing. Indeed, mining technology has this characteristic: it can be used to mobilize more resources, but it can rarely make them cheap.

So, there is a contradiction here: we are using a more expensive technology to produce a commodity whose prices, however, went down considerably. What's happening?

I think the explanation, here, lies in financial factors. What we are seeing, indeed, is mainly a financial bubble in which investors are led to pour money into a market with the hope to make a lot of money. That's a hope, obviously, for the future because, right now, I am sure that nobody can make a lot of money with such low gas prices - actually I think a lot of people are losing money. But this is the magic of the financial market: if everyone believes that a certain commodity will have a large value in the future, then they invest in it, and the result is overproduction.

So, we are talking of a financial bubble and we can compare the gas bubble with the housing bubble, the one that exploded in 2008. There is a difference, though: as the respective bubbles grew, home prices went up while gas prices went down. Well, there is a logic: we have very limited capability of storing the overproduction of gas - so we must burn it. In a way, we are burning gas in order to keep the gas market alive. That's not the case with overproduction of homes: you don't need to burn your home in order to save it; at least not so far (although sometimes rather drastic measures are needed) (*).

So, all that overproduced gas had to be sold on the market and that led to prices going down. It is what we are seeing. Now, the point is for how long the market will be willing to finance the production of something that is generating such small returns (if it is at all). Consider also that in the process we are also destroying water sources and polluting vast areas; to say nothing of the methane leaks resulting from drilling. All these are costs, too - someone will have to pay for them, sooner or later. So, I think we'll see prices going up - it is unavoidable. But that may cut the demand and may cause also production to go down. We seem to be seeing both effects ongoing, right now: lower production and higher prices. It is still too early to see a robust trend, here; but I think this is unavoidable - the shale gas revolution may be already over.

See also this article on shale gas by Ugo Bardi


(*) An apartment building in Italy, near Ugo Bardi's home. Here, the owners couldn't rent the apartments at a price that they judged good enough, so they preferred to keep them vacant. To make sure that squatters won't come inside, they even walled up all doors and windows. They are waiting for the market to miraculously return to the high prices of once. Good luck!


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)