At Fivethirtyeight, Ben Casselman suggests that Saudi Arabia may finally be winning its war on fracking. In his words:
Recently, though, there have been signs that the Saudis’ strategy might be working after all. On Monday, Chesapeake Energy, once the highest flier of the U.S. oil boom, had to deny publicly that it was preparing to file for bankruptcy; some 60 oil companies have already done so, and the research firm IHS estimates that as many as 150 companies could follow suit. On Wednesday, The Wall Street Journal reported that private-equity giant KKR & Co. was backing away from risky bets on oil companies. Industry leaders are starting to sound desperate: The New York Times quoted the head of a Texas oil group as telling his members that “today our goal is to survive.”
I have some doubts. But let’s say bankruptcies take hold across the sector and production does crash. What then?
Well, the rigs won’t be dismantled. The oil workers won’t lose their skills. The infrastructure won’t disappear. And drilling and completion of a known site takes only one month and costs about $6 million. (Page 13.) Even if you add in all pre-drilling activities you’ve got only about six months to complete a well.
In other words, once prices rise American production will shoot back up even faster than it falls. So what in the name of God does it mean to say that Saudi Arabia is “winning” its war on American production? You need one weird model of the oil market, in which removing American production sends prices up but bringing it back on does not cause prices to fall. (In that model, I should point out, Saudi Arabia would be doing the American industry a favor by forcing it to temporarily cut production.) Or one in which Saudi Arabia would be unable to sell as much oil as it wanted to in the face of full American production. Neither sounds particularly plausible.
Perhaps I am missing something, but the idea that the Saudis are warring on U.S. unconventional oil production does not make sense to me. It is a mighty expensive war and one that they cannot win. So why would they try?