Shale Oil Is a Ponzi Scheme Bcause of Its Unique Production Process

 

Shale oil is unique in the way it is produced because it yields a very front-loaded result. Shale producers get 50% or more their oil in the first year that a well is in service. The companies continuously drill new wells to be at peak production levels and keep the cash flow strong. As a result, there has been a massive amount of capital that has come into the market to chase these investments. Ultimately what happens is something that Greenlight Capital's David Einhorn spoke about at the Sohn Investment Conference in May in terms of enterprise and capital inflows and outflows. Essentially, the industry looks at cash coming out of the business and doesn't look at the cash that has to go into the business. Dan Dicker, senior energy analyst at TheStreet, tells Jill Malandrino that he likens shale oil to a Ponzi Scheme. Fundamentally, the oil supply glut remains strained. As crude moves lower, producers dial back on production and hope for a demand increase and draw downs in supply. But when crude moves higher, producers rush to get wells back on line flooding the market with new product which stresses the supply glut.