The U.S. Shale Business Is Broken
Keith Kohl
No, those aren’t my words. They’re taken straight from the mouths of those operating in what is unquestionably the most important oil region in the world — the Permian Basin. Oil companies in West Texas are now pleading for someone to listen, holding out hope that the market will realize that the low oil-price environment is slowly killing them.
Don’t get me wrong, dear reader, I understand why they’re staring at a skeptical market. After all, the EIA just reported that U.S. domestic crude production hit an all-time record of 13.6 million barrels per day in July, 2025.
And yet, in many ways that oil output record in July is even more frightening. Why? Because the investment herd fully expects more of the same, and they’re going to stay excited over U.S. oil output growth right up until the entire E&P sector steps off the cliff and plummets into chaos.
In many ways, it now echoes the collapse of Texas oil in the 1980s — when once-unstoppable wildcatters were brought to heel by a brutal glut and price crash that fed on its own excess. In 1986, oil fell from $27/bbl to below $10/bbl as oversupply, debt-laden producers, and collapsing demand collided.
Mind you, that crash didn’t happen overnight — it was years in the making.
Today, we’re seeing the same structural warning signs: Cheap oil choking investment, capital deserting the field, and a fragile production base propped up only by inertia.
The only difference is that this time, instead of cowboys with roughnecks, it’s shale engineers armed with horizontal drilling rigs.
And this will end up being just as bloody.
For years, Wall Street believed that the U.S. shale patch was a perpetual motion machine, capable of defying gravity as long as there were enough rigs and frack crews in the Permian.
Every time the market doubted, West Texas answered with more production. Make no mistake, the resilience in the shale patch due to increased drilling efficiency has been nothing short of miraculous, and the ONLY reason why U.S. oil production hit that new all-time record last July — a new record, a number that lulled casual observers into thinking this show could run forever.
But those of you in our investment community that have watched this industry long enough know better.
Oil production isn’t some magic spigot. It’s a treadmill, and these tight oil wells come with a much, much sharper decline rate, which means the treadmill must run faster and faster just to stay in place.
So when prices fall, capital dries up, and more rigs start idling because the economics simply don’t justify new drilling. You can sure as hell bet the treadmill will stop… and that’s when the oil illusion shatters.
I think we’re closer to than you might think, too.
You see, the Dallas Fed just confirmed this grim reality in its latest energy survey, and it should terrify anyone who thinks oil is headed for another long bear market. Oil and gas executives in the Texas oil patch, when asked about the outlook, painted a picture of an industry bleeding out due to low prices.
Their responses weren’t couched in polite corporate jargon, either. They were blunt, going so far as to directly say that the U.S. shale business was broken.
New wells aren’t getting drilled, capital spending is on hold, projects are getting shelved, and cost inflation is suffocating operator margins.
As one oil exec put it, “We’re bleeding. Current oil prices do not support reinvestment.”
Look, this isn’t hyperbole. The survey data showed activity slipping in Texas, Louisiana, and New Mexico — the very heart of America’s oil renaissance.
Our drillers have become weary, and their balance sheets won’t let them play much longer when crude is below $65/bbl oil, let alone at $50/bbl or even $40/bb.
You’ll find that this is one of the biggest issues, because $40/bbl oil is exactly where President Trump says he wants to drive prices.
He’s made that perfectly clear, too. We can’t exactly blame him, can we? Remember, cheap gasoline is a political goal, even if it guts the domestic oil industry. And there’s no denying that cheap energy is a key factor in allowing the economy to chug higher.
Granted, it’s also much easier for politicians to promise drivers relief at the pump because the cost of that cheap oil always comes later, when the production base buckles under the weight of underinvestment.
History is littered with examples. The 1980s crash hollowed out Texas towns; the 2015 shale bust left bankruptcies scattered across the oil patch.
Each time, investors who bought into the illusion of endless cheap oil learned the hard way. But oil doesn’t stay cheap forever, because cheap oil sows the seeds of its own destruction.
Keep in mind that the problem is compounded by the very nature of our shale wells. Unlike conventional fields in Saudi Arabia or Kuwait, our vast tight oil wells — which account for virtually ALL of our production growth since 2008, don't gush for decades. The decline comes hard and fast, particularly after the first year of production, which means U.S. oil production is inherently short-lived unless new capital continually replenishes the base.
Think of it like a leaky bucket. You can keep it full only if you’re constantly pouring water in. The moment you stop pouring, the bucket drains quickly.
Now that oil companies are delaying investment decisions, the leaks will grow larger. It’s the unfortunate fragility in our tight oil supply that most investors miss when they look at today’s production data.
Sure, output looks strong — but it’s a mirage, propped up by yesterday’s drilling, not tomorrow’s.
Things wouldn’t be as dire if global demand were truly peaking, too. That’s been the narrative we’ve been fed by the IEA for years, and it was that forecast which justified the aggressive push toward renewables at the expense of new oil and gas investment.
Now, the cracks in that narrative have widened too much, and the IEA is preparing to walk back its peak-demand fantasy in its upcoming World Energy Outlook. Rather than peaking in the next few years, global demand growth is expected to continue growing for the next two decades.
That’ll be the IEA’s final admission of defeat — a recognition that the world is not ready to give up oil. And when you pair steadily rising demand with a supply base that’s wobbling, the math becomes obvious.
Prices WILL rise.
OPEC knows this, which is why the House of Saud is more than happy to watch U.S. shale producers suffer under low prices. Cozying up to the Trump administration and keeping oil prices low has led to OPEC retaking the world’s oil throne.
Every investment dollar put aside in the Permian Basin and every canceled upstream project is a gift to Saudi Arabia and its allies.
For more than a decade, U.S. shale operators stole market share from OPEC, breaking their grip on pricing power. So as you can imagine, OPEC gets its whip handed back the moment U.S. production falters.
The Dallas Fed survey might as well have been music to their ears. And make no mistake, they’re watching. They know that the longer the illusion of cheap oil persists, the more fragile the U.S. production base becomes. Then, when demand tightens the screws, OPEC can dictate prices again.
But cheap oil today isn’t a curse for investors — it’s a gift.
It’s also an opportunity for those that recognize it, and the only question is whether you’ll be holding the right stocks when it happens.
Dan Steffens
Energy Prospectus Group |
