The article below is an excerpt from our Q2 2024 commentary.
“Let us pledge that by 1980, under Project Independence, we shall be able to meet America’s energy needs from America’s own energy resources.”
~ President Richard Nixon, November 7th, 1973
“We will lower the cost of energy. We will drill, baby, drill. We will do it at levels that nobody’s ever seen before.”
~ President Trump, Republican National Convention, July 19th, 2024
President Trump has once again pledged that, if re-elected, he will slash the cost of energy in the USA. At the Republican National Convention, he declared his intention to spark a monumental drilling boom that would flood the market with oil and natural gas, ultimately bringing prices down to a comfortable level for all.
Should Trump win the upcoming election, we can anticipate an uptick in his rhetoric. This rhetoric will undoubtedly send strong negative signals through the investor community—a community that has already adopted a bearish outlook on global oil and gas markets. But here’s where it gets intriguing: despite the sincerity and good intentions behind Trump’s plans, our analysis suggests that the geological forces at play make this pledge more of a wish than a realistic goal.
President Trump is not the first president to put forward a national goal of significantly increasing US oil and natural gas production. In 1973 President Nixon announced the same goal which was thwarted by geological forces—ironically the same geological forces are strongly at work today.
Our research, though controversial and met with skepticism by some commentators, leads us to stand firm in our conclusions. Critics argue that we misunderstand the interchangeability of energy molecules—such as the notion that natural gas, with its perceived surplus, can seamlessly replace oil in various applications. Yet, we remain steadfast in our belief that U.S. shale oil and natural gas have reached their peak and are on the cusp of decline. We ask that you, the reader, proceed with an open mind.
The shale boom that has taken the world by storm since 2010 is spectacular. U.S. shale oil has accounted for nearly 90% of global non-OPEC oil supply growth. Shale gas turned America from a significant LNG importer into the world’s largest exporter. Today the US comprises almost 25% of global LNG production.
However, as impressive as this surge is, our analysis indicates that U.S. shale oil and natural gas have peaked. The narrative is reminiscent of the 1970s when U.S. oil and gas production continued to fall despite skyrocketing prices and an unprecedented drilling frenzy.
Let us rewind to those crisis-filled days of the 1970s. Oil prices had soared, gas lines stretched for miles, and President Richard Nixon delivered his famous “Energy Independence” speech to the American public on November 7, 1973. With visions of “Project Independence,” Nixon aimed to free America from its reliance on imported oil. But unbeknownst to him, geological constraints were at play that would make this goal unattainable for decades.
In 1970, the U.S. produced 11.3 million barrels of oil per day. Despite a tenfold increase in oil prices and a fourfold increase in rig counts by 1981, production had declined by over 1 million barrels per day. It was Hubbert’s Peak, that pesky geological principle that rendered further growth impossible. Unbeknownst to President Nixon, the US in 1970 has just produced half of its recoverable conventional oil and natural gas reserves, making both future production growth, and President Nixon’s energy independence goal impossible to achieve.
Note the fascinating trajectory of oil prices, rig counts, and U.S. oil production in the graph below. You’ll see a story that challenges the conventional wisdom that more drilling always produces more production. Back in the 1970s, U.S. production didn’t grow as expected despite one of the most significant drilling booms in history. It’s a tale of exuberance and excess, wonderfully chronicled in Mark Singer’s Funny Money. This book explores the spectacular collapse of Penn Square Bank, which led to the downfall of Continental Illinois— once deemed among the best-managed banks in the nation. Singer captures the essence of the drilling frenzy that gripped the oil and gas community across the U.S. We highly recommend our investors read the book.
But why did U.S. oil production decline even as the rig count soared fourfold? As discussed in a previous essay, “Remembering 1970 and 2000,” the U.S. hit its Hubbert’s Peak in 1970. This principle tells us that once a field produces half of its ultimate recoverable conventional reserves, there’s little anyone can do—geologist, engineer, or politician—to reverse the trend. Over fifty years, U.S. conventional production has declined to a mere 3.3 million barrels per day, a steep drop of nearly 75% from its 1970 peak.
Though earnest in his efforts to achieve energy independence, President Nixon was thwarted by these immutable geological forces. As the 1970s progressed, America’s dream of energy independence drifted farther out of reach. By 1979, the demand for imported oil had climbed from 6.4 million barrels per day to 8.3 million, making independence more elusive than ever. For those keeping score, the gap between U.S. production and supply widened, peaking in 2006 at 13.6 million barrels per day, just as the shale revolution gained momentum.
Surging drilling activity also failed to lift natural gas production. Falling natural gas production and unusually cold winters produced shortages, culminating in President Jimmy Carter’s famous televised sweater speech urging Americans to turn down their thermostats in the winter of 1977. U.S. conventional natural gas production also reached its peak in the 1970s, which is right in line with Hubbert’s principles. Like its oil counterpart, conventional natural gas production saw a brief uptick in the 1990s but its relentless decline has been impressive. Today, conventional U.S. natural gas production hovers just above 20 billion cubic feet per day, marking a steep fall of over 65% since its peak in the 1970s.
The U.S. found itself navigating two distinct energy crises in the second half of the 1970s: the natural gas crisis of 1977, spurred by dwindling supply and back-to-back frigid winters, and the 1978 Iranian Revolution, which toppled the Shah and sent oil prices skyrocketing again.
We revisit the 1970s not out of nostalgia for standing in gas lines and living in ice-cold homes- but as a cautionary tale for what this decade might hold since we find ourselves in a similar situation. The U.S. shale revolution began in the early 2000s and has been remarkable, but unfortunately, the shales follow the same geological rules as conventional fields. Our models indicate that all shale plays are leveling off and poised for decline, just as conventional production did in the 1970s.
Even if President Trump could engineer a drilling boom, production may not grow as expected. As history shows, the rocks beneath us have a way of dictating their own terms, regardless of the promises made from the podium.
Intrigued? We invite you to download or revisit our entire Q2 2024 research letter, available below.
Join us for 2024 INVESTOR DAY on Monday, October 21: "Geopolitics, War, and Commodities". Both in-person and virtual options are available. For detailed information or to secure your spot, head over to: https://conference.gorozen.com
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