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Oil: What the heck is happening?

Want to really understand what’s going on with all the crazy things happening in the oil business?

Read this book: The Green and the Black. The Complete Story of the Shale Revolution, the Fight over Fracking, and the Future of Energy

The book is by my brother, Gary Sernovitz, described as “a brilliant novelist, hilarious cultural critic, energy-industry insider, and self-described ‘liberal oilman.’ This has to be one of the most searching, literate, and funniest books about American energy ever written, and it will usefully complicate even one’s most zealous certainties about fossil fuels.” — Tom Bissell

To get a sense of it, here’s an excerpt by Gary, originally published on Medium:

Everyone knows that the U.S. oil and gas shale revolution is important — see $29 oil, $2 per thousand cubic feet natural gas, and U.S. producers starting to export this month both liquefied natural gas and oil, as if we’ve suddenly turned into Qatar. Yet the popular understanding of the shale revolution is sometimes simplified as a morality tale about grit and Texas exceptionalism (and, okay, Oklahomans too): that the world forever changed because, starting in 1998, stubborn coots and debt-drunk wildcatters like George Mitchell, Harold Hamm, and Aubrey McClendon found new ways to frack and drill horizontally in nutty places like North Dakota.

This country-fried, overly personalized explanation has some truth in it, but it ignores the fact that the shale revolution fits into the business world’s favorite explanation for everything today: Harvard Business School professor Clayton Christensen’s “disruptive innovation” theory of how market leaders lose their crowns. In the 1990s oil business, just as you’d expect in Christensen’s theory, smart money technology leaders like ExxonMobil and Shell had largely abandoned U.S. onshore fields, especially third-tier impermeable shale reservoirs. Smaller, low-tech U.S. independents began experimenting with these abandoned reserves because, well, they couldn’t afford the big kids’ toys. Then through long trial and error, using off-the-shelf technologies and some clever new adaptions, operators made the shales competitive with the cost structure of other sources of oil and gas. And just as the dot-com boom took off in the mid-1990s even though AOL and Prodigy had been around long before, production from the low-cost shales post-2009 exploded from further technical adaptations and powder kegs of capital. For five years, the shales grew faster than almost all other new global sources oil and gas, were cheaper than most of those other sources, and also “better” — coming in simpler projects, with quicker return of capital, and more flexible cash outlays.

The U.S. shales are the Internet of oil not only because they completely changed everyone’s understanding of how the oil business must forever be — no longer were oil and gas fated to be ever more expensive, coming from ever harder to reach reservoirs, driving us all into practicing our Charlize Theron moves for the next Mad Max — but because they opened up the business to smaller operators, with democratized technology, producing oil and gas more effectively than Big Oil.

Thinking about the shales as a disruptive force, like the Internet, helps us process the brutal, fight-to-the-death state of the oil business today. Business disruptions, whether in the Christensen model or from new technology (as in the case of the Internet), can be sloppy — and should be sloppy, confusing, jarring, and rude. Hundreds of billions invested by old paradigms are no longer true. Saudi Arabia’s decision in November 2014 to abandon its role as a swing producer, the precipitating factor of the long collapse in oil prices, was rational. The country was facing competition from a new disruptive supply. It couldn’t ignore the shales any more than Barnes & Noble could have decided that Amazon was a Seattle fad.

Investors are asking: if it is now 2002 for the Internet of oil, which companies will be the Google or Amazon of Shale 2.0, winners of the first land rush that used the market downturn to consolidate their position, or buy cheap tuck-in acquisitions, to become even more dominant in the next phase? Which companies will be the unicorns of Shale 2.0 (if Internet unicorns are not bubbling over right now as the next big joke), the Ubers that didn’t even exist in the 2002? And, sweet billions, could there be a Facebook of Shale 2.0, a colossus that emerges from nowhere, and fast? For me, at least, the metaphor breaks down here, given the finite amount of land that is prospective for the best shales, the commoditized nature of oil and gas, and the fragmentation of U.S. oil and gas producers.

Then again, in the Internet too, few in the bleakest days of 2002 saw clearly the changes, growth, and dominance to come — maybe even Mark Zuckerberg, who in 2002 had just graduated high school.

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