Steven Mufson is a Washington Post staff writer covering business and climate change.
In 2012, Leonardo Maugeri, the former chief strategist of Italian oil and gas giant ENI, coined the phrase “Saudi America” and predicted that the fracking boom would make the United States as big an oil producer as Saudi Arabia.
That level of production is now within reach, somewhat earlier than the late Maugeri expected. U.S. crude-oil production hit a record milestone in August, when it exceeded 11 million barrels per day for the first time, according to the federal Energy Information Administration. Oil output from one geologic region alone, the Permian Basin in West Texas, has exceeded the output of eight of the 13 members of the Organization of the Petroleum Exporting Countries. And U.S. imports of crude oil have plummeted to the lowest level since 1967 (though they have not disappeared).
Bethany McLean, a contributing editor at Vanity Fair, has borrowed that phrase as the title of her timely book, “Saudi America: The Truth About Fracking and How It’s Changing the World.” It is one of a series of novella-length reportorial books published by Columbia University.
McLean, who was a co-author of the bestseller “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron,” has tapped into the recent history of the U.S. oil and gas boom. She describes geology in plain English, recounts the rise and fall of one of the country’s most flamboyant shale gas tycoons, and studies the political consequences of a United States that is far less dependent on oil imports than it was just a decade ago.
In each case, informed by her experience in financial affairs, McLean has cautionary words about the limits of U.S. output, the financial perils of betting on shale exploration stocks and the dangers of believing that the United States is somehow free from the geopolitics of petroleum.
First the geology. Fracking combines recent advances in horizontal drilling with age-old hydraulic fracturing — which involves shooting water and sand and chemicals into a well to extract bits of oil and gas. The process pries loose oil and gas from shale rock that had not been valued before.
Second, the ability of oil and gas exploration companies to tap into the underground formations is a result not only of technology but, just as important, of cheap capital, McLean argues. And in the past decade, as the Federal Reserve kept interest rates low to revive the economy, that capital has been extremely cheap.
“The fracking boom has been fueled mostly by overheated investment capital, not by cash flow,” she writes. She quotes a mergers and acquisitions adviser as saying, “As oxygen is to life, capital is to the oil and gas business.”
No exploration tycoon reflected that phenomenon more than the late Aubrey McClendon, whom she describes as “a bit of J.R. Ewing” from the fictional television series “Dallas,” mixed with Michael Milken, the junk-bond king who arguably changed the world before winding up in prison for securities fraud. In the catastrophic financial year of 2008, McClendon’s board gave him a $75 million bonus, lifting his total pay for the year to $122 million, the largest amount for any executive in the country.
McClendon, whom McLean weaves into one-third of her book, built Chesapeake Energy into a dominant player in shale gas during years he dubbed “The Great North American Land Grab.” But his bet on natural-gas prices turned sour, and he went broke. Hounded by creditors and securities regulators, he died in a fiery car crash. Many thought then and still think now that it was suicide.
Other shale players might be less flamboyant, but the very structure of the shale business has some important fault lines. For all the hoopla about the surge in U.S. oil and gas production from fracking, most people overlook an important feature of the boom: The average shale well produces most of its oil or gas in the first two years. That means oil companies must keep drilling new wells to keep production steady. In short, they have to keep running — and quickly — just to stay in place.
McLean shows this with numbers: “To maintain production of 1 million barrels per day, shale requires up to 2,500 wells, while production in Iraq can do it with fewer than 100.”
The third and last section of McLean’s book is fortuitously timely. With the murder of Jamal Khashoggi, the United States is threatening punitive action against Saudi Arabia, and the kingdom is trying to ease tensions. Both sides want to keep business between the two nations going. There has been little talk of a 1970s-style oil embargo or even a production cut from the Saudis, in part because the kingdom could suffer as much as the United States now that America has sharply reduced its dependence on crude-oil imports.
But some lawmakers and policy experts believe that reduced imports of crude oil can make America free of petroleum politics. Not so, McLean says.
“Even if America doesn’t need Middle Eastern oil, its allies in Europe do, and China certainly does,” she writes. “This isn’t just altruism. In a world where over 40 percent of the S&P 500’s revenues come from outside the U.S., the American economy is dependent on the global economy.”
She brings a sensible financial eye to the Trump administration’s talk about American “energy dominance” and the “believers” who think technology will help the country outgrow its petroleum problem.
She writes, “Even today, it is unclear if we will look back and see fracking as the beginning of a huge and lasting shift — or if we will look back wistfully, realizing that what we thought was transformative was merely a moment in time.”
By Bethany McLean
Columbia Global Reports. 138 pp. $15.99 paperback