The shale gas bubble: burning your home in order to save it  

Ugo at Cassandra's Legacy has a post on the shale gas bubble in the US - The shale gas bubble: burning your home in order to save it.

Ladies and gentlemen, let me comment on a point of this interesting discussion. We have been told, correctly, that the production of shale gas in North America is booming and also that prices are now very low; around 2 dollars per million cubic feet. It is, actually, somewhat more than that but it is still a low price in comparison to what it was some years ago; before the shale gas "revolution".

On the other hand, producing shale gas is expensive. "Fracking" is a technology that was developed long ago, but it was never used on a large scale because it was too expensive in comparison to conventional gas production. And that's reasonable: for fracking you need sophisticated equipment, chemicals, and more. In addition, a shale gas well is rapidly exhausted, so that you must go on drilling in order to keep producing. Indeed, mining technology has this characteristic: it can be used to mobilize more resources, but it can rarely make them cheap.

So, there is a contradiction here: we are using a more expensive technology to produce a commodity whose prices, however, went down considerably. What's happening?

I think the explanation, here, lies in financial factors. What we are seeing, indeed, is mainly a financial bubble in which investors are led to pour money into a market with the hope to make a lot of money. That's a hope, obviously, for the future because, right now, I am sure that nobody can make a lot of money with such low gas prices - actually I think a lot of people are losing money. But this is the magic of the financial market: if everyone believes that a certain commodity will have a large value in the future, then they invest in it, and the result is overproduction.