There is no better way to describe what is currently taking place in the U.S. Shale Oil Industry, then a bloodbath. Unfortunately, if the situation wasn’t bad enough for the shale oil industry when prices were 30-40% higher, today it’s a complete disaster. While some might think that a bit of an overstatement, I can assure you that these low oil prices are doing serious damage to an already weakened shale industry.
The major problem with the U.S. shale oil industry from the get-go was that the huge decline rates, indicative of horizontal fracking, devour a massive amount of capital. Furthermore, capital expenditures that are used to frack a shale well is a much different animal than building a gold mine. Because shale oil wells experience a 75-80% decline rate in the first few years, the industry must continue to spend even more capital to offset oil production losses. However, capital spent on a gold mine will last for 15-20+ years before the deposit is depleted.
So, capital spent in the U.S. shale oil industry is not really a long-term investment as would be a gold mine. Thus, the capital expenditures in the shale oil industry behave more like “COSTS” than “INVESTMENTS.”