Energy Strategy, Technology, and Current Issues in the Oil Industry
Energy Overview / Current Issues in Energy

Susan Smith Nash, Ph.D.

Bubble Economies and Carbon Economies / Fire sales and “vulturing”.

Critics of both “bubble economies” and over-reliance on fossil fuels have pointed to the possibility of a major crash coming again due to overvalued stocks that rely on oil, gas, and coal.

A “carbon bubble” could lead to a collapse of interconnected economies, and the resulting “fire sales” could lead to problems.

A flock of vultures is formally called a “committee,” which seems appropriate to what is occurring in the oil industry. New technology has allowed previously uncommercial reserves to be exploited, but that success has come at a price: plunging gas prices. Because many operations are not commercially viable, it has been seen as an option to sell them with the hopes that prices will start to rebound within 3 or 4 years, when more uses of natural gas hit the market, and demand increases. In the meantime, the vultures are circling distressed properties.
Arthur Berman, a highly published pundit and, to some, a Cassandra, has asserted all along that the fire sales and “vultures” are going to continue in shale gas plays for the following reasons:
•    the success in horizontal drilling and hydraulic fracturing has led to an oversupply of gas
•    leasing the acreage in a shale play and drilling to establish production in order to hold the lease both involve “tsunamis of cash” (Berman’s words)
•    the completion and stimulation techniques are not technologically advanced enough to keep the oil and gas flowing; there are steep decline curves
The only real question, if one believes Berman’s prognostications, is whether or not the vultures who snap up shale plays at fire sale prices will be able to operate them economically.

Some of the companies and acreage that have found that they took on too much debt in order to provide capital for aggressive leasing and drilling programs included Sandridge, who sold their producing properties in the Permian, and Chesapeake, who sold properties in the Mississippian (Kansas / Oklahoma), Marcellus (Pennsylvania), and Eagle Ford plays.
It is useful to note that not everyone believes that the current shale play is a bubble. They believe that future success is a matter of technology, and new technologies in drilling, stimulation, water treatment, communications technology, and computing power will transform now-uneconomic oil and gas plays to highly profitable ones, with much higher ultimate recoverable reserves. 

Further, there are others who believe that the new plays will transform U.S.’s position in energy and lead to energy independence.

Carbon bubble will plunge the world into another financial crisis – report
Trillions of dollars at risk as stock markets inflate value of fossil fuels that may have to remain buried forever, experts warn

Oil and Gas Asset Clearinghouse

Midwest Energy Auctions

Expert: Shale Gas Boom a Bubble About to Pop

Guiding Questions:
What is a bubble, in economic terms?

What causes bubbles? What causes them to get bigger? What makes them “pop” or collapse?

What are the pros and cons of generating growth / investment by creating conditions conducive for bubble formation?

Once the bubble collapses, what are some typical survival strategies?

Where are distressed properties / assets in a bubble “pop” and how can they be a part of a company’s strategic plan?

What kinds of companies are in a position to take advantage of a bubble pop?

What do those who are skeptical about the viability of shale gas say to support their position?
What is the role of technology in the shale revolution?