This piece is excerpted from my upcoming book "Shale Oil Boom, Shale Oil Bust - The Myth of Saudi America" coming in May.
NEW YORK (Real Money) -- Shale oil is a Ponzi scheme. I don't mean that there is a vast conspiracy inside the energy world to confuse investors about its potential or fleece Wall Street. What I mean is that the business of drilling for oil from shale creates an endless circular appetite for more drilling for lesser returns.
Think of a classic Ponzi investment scheme -- constant fresh capital is needed to generate false gains and pay off early investors. Shale production is similar in that more and more drilling is constantly needed to continue to generate even equivalent returns, much less growing ones. In a classic Ponzi scheme, when the new money inevitably stops coming in, the pyramid quickly collapses. In shale, that moment when the pyramid becomes too heavy to sustain itself is far from being reached, but the inevitability of it is equally clear. Further, I believe that the tipping point is far closer than most other analysts, and certainly the U.S. Energy Information Agency (EIA), believe it to be.
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The main reason I characterize shale oil production as a Ponzi scheme is because of the fast decay of shale oil wells as compared to virtually all other oil production. One chart is enough to give a good indication of the progress and problems of oil from shale: