A note about this three-part series:

Policymakers, tech plutocrats, and a cacophony of pundits serially talk about revolutions in energy and technology. “Revolution” is a powerful word but is so overused in these domains that it’s lost meaning. But real revolutions, by definition “radical and pervasive changes,” do matter. Using the proper meaning of the word, this series explores the realities of the only three energy revolutions that have happened in recent history.

The Promethean task of supplying energy to the U.S. economy and the rest of the world involves scales that are truly difficult to visualize. Many options appear to make sense until you crunch the numbers. That’s why Bill Gates said that people need to bring “math skills to the problem.”

Consider petroleum alone, which accounts for about one-third of global energy use. If the world’s current oil supply were delivered in a pile of actual barrels, that stack would rise up at a velocity of 1,500 miles per hour and reach the moon’s orbit in a week – and continue at that rate every week for years to come.

Meanwhile, solar and wind power are the two most discussed “disruptions” to our energy supply. It is true that solar/wind costs have gone down dramatically in the past decade. At the same time there’s a policy revolution in subsidies (more about policies in part 3 of this series) leading to a cumulative $100+ billion in the U.S. for solar/wind. The effect of this combination has been to proliferate solar panels and wind turbines sufficient to drive a nearly 10-fold increase in combined energy supplied from those sources.

While that’s quite remarkable, wind and solar together still supply less than 1.5% of America’s energy. Fast growth from a small number is like winning $100 in Vegas on a $10 bet. Nice, but not life-changing.

To find a “radical and pervasive” change in energy markets we have to look elsewhere. Over the same decade noted above, the amount of energy added to America from shale hydrocarbons was 2,000% greater than the additional supply from solar and wind combined. That actual revolution also happened because of the maturation of new technologies. But, notably, in this case it took place without the stimulus of special subsidies.

The scale and velocity of the shale revolution is underappreciated. It is the fastest and biggest addition to world energy supply -- not just hydrocarbons, but all forms of energy -- that has occurred in history. The only time something close to as dramatic has occurred was in the decade following the 1968 opening of Saudi Arabia’s giant Ghawar oil field.

Growth in Oil Output Of Four Big Producers

This American transformation has far-reaching implications, not least of which is that the U.S. now exports crude – savor the word “exports” – at a rate north of 1 million barrels a day. That’s the highest rate of U.S. crude exports since 1958, by a factor of two, and outstrips the crude exports of five of OPEC’s members. Four decades of handwringing about import dependencies and serially misguided federal energy policies were upended overnight.

Looking to the future, the Energy Information Administration (EIA) “optimistic” forecast (which assumes subsidies continue) see solar and wind output growing three-fold by 2035. EIA’s optimistic forecast for shale hydrocarbons for the next two decades (still no subsidies of course) has that industry replicating it’s growth of the past single decade. We’ll suggest, shortly, why that’s actually a pessimistic forecast. So by 2035, the American energy revolution will still be driven by oil & gas.

But the revolution with respect to shale goes far beyond ‘mere’ quantity. In many quarters, the enthusiasm for solar and wind has been animated largely by the notion that these sources democratize energy production. But in fact, wind and solar growth in the past decade is utterly dominated by utility-scale projects, and a Darwinian consolidation of the companies that produce the hardware. There are currently only a few major wind turbine vendors (only one in the U.S.); while a comparably small number (most in China now) of solar panel producers utterly dominate the market. In short, we’ve seen the emergence of “big solar” and “big wind.”

The shale story has been precisely the opposite. None of the “big oil” companies, the super-majors, were responsible for creating the new shale industry. The pioneers were all upstarts with names like Continental, Pioneer and Brigham. There are hundreds of shale drillers; more than four dozen relatively unknown companies comprise the top ranks. The majors, of course, have noticed and have started to get into the game, but they will still constitute a small share of that industry for the foreseeable future. The rapid emergence of a new, diverse and broad community of companies in the U.S. shale industry is a classic, American entrepreneurial bootstrap story culminating in a new industry that has truly democratized a huge swath of the energy landscape.

And second only to its staggering scale, the single most remarkable and revolutionary feature of the shale ecosystem is, in a word, velocity. It’s not just the speed with which that industry went from essentially zero to a $100+ billion per year business – about which we note: this was a faster and bigger growth in revenues than the contemporaneous rise in smartphone sales in the U.S. It is also the speed with which wells can be drilled. Rather than planning and development that can take not just multiple years but even decades for traditional billion-dollar hydrocarbon projects, each shale well is an individual decision involving nearly a thousand-fold less capital. Those decisions are made in weeks to months. And, critically the wells can be drilled in a week or two.

The world has never seen anything like this. The net effect of all this is a collective U.S. shale ecosystem that can respond organically and rapidly to price fluctuations. We’ve already seen the result of this in action. The huge oil price collapse that began in 2014 and lasted until only a few months ago did lead to a pullback in U.S. production, but only about a 10% decline. Now with a modest price rise of the past several months, investments, and drilling and production, have come roaring back and are on track and could reach new record levels this year.

But the price collapse – a collapse, it bears noting, that was engineered by the Saudis to discipline markets – did result in some casualties in the form of bankruptcies and layoffs across the shale domains. Hydrocarbons will continue to be cyclical commodities both from manipulators and natural market dynamics. However, high-speed U.S. shale now becomes a throttle on price rises. What we have learned from this latest price cycle is that the staggeringly large shale system is in fact quite resilient.

Just see what happens if you propose that the solar and wind industry be subject to a cyclical and spot pricing system and have to deal with a 60% drop in revenues (as the oil business experienced) without the crutch of semi-permanent pricing and guaranteed off-take. That such a state of affairs would likely deal a deathblow to solar/wind growth is not speculative; it’s precisely what industry lobbyists tell policymakers on both sides of the aisle every time it is suggested.

So while solar/wind advocates ply the halls of Congress and statehouses to preserve access to the people’s capital, the total amount of capital committed by private entities to the shale fields rose by nearly $40 billion in the first quarter of this year. That money is not coming from captive ratepayers, or government gifts. Shale financing comes from America’s broad and distributed financial markets; the world’s most diverse, liquid, and resilient.

Resurgent investment in the shale fields will inevitably -- that’s the point of the investment -- result in another jump in hydrocarbon output, stimulating America’s economy, boosting jobs and exports, reducing the trade deficit, and enhancing federal and state treasuries with tax and royalty receipts. There is, after all, a kind of “free lunch” for policymakers.

What we have also learned from the cyclical downturn in oil prices is that the technologies involved in shale production are getting better at an amazing rate. The efficacy of shale rigs – the amount of physical production per capital dollar spent – has been improving by more than 20% per year on average. Put another way; the rigs are getting roughly twice as productive every three years. No other energy technology is improving that quickly. And EIA data shows that rate actually jumped during the last couple of years during the price downturn.

When Eagles Soar?

But many still believe that a future energy revolution depends on solar and wind. Of course those technologies will get far better. But, as is clear from NREL data, both wind and solar are now experiencing a declining rate of improvement as those technologies start to approach their limits in terms of what physics permits. They still improve each year, but now necessarily at a slower rate than in the past.

Shale technology is a long way from its physics limits. In fact, the industry is at the beginning of what I’ve earlier termed Shale 2.0. Only now has the industry just begun to embrace the kinds of software and digital solutions that common in other industrial domains.

It is no longer speculative to suggest that shale production will soon be boosted, even radically, by digital tools. Analysts at BofA Merrill Lynch in March 2017 released their report telegraphically titled, “The Internet of Oil.” McKinsey thinks that a digital revolution in oil and gas is coming but is hidden (not for long). Goldman Sachs, and many others, has finally concluded that the shale revolution is structurally permanent. It’s taken time for the punditocracy to realize that the shale business more closely resembles a manufacturing industry than an “extractive” one, and it’s about to benefit from Silicon Valley-class tools as a spate of startup tech companies start chasing such a big prize.

The bottom line here is important. If you were interested in investing in genuinely revolutionary energy technologies in order to get the biggest bang for the buck, where would you place your bets? This question is relevant for private investors in public companies and increasingly start-ups too. It should also be relevant for policymakers invoking the euphemism of “investment” when making bets with taxpayers' funds.