Oh, Oh, Domino – The Shale Revolution and Energy Market Fundamentals: The Book

Energy market volatility in 2015 was neither the result of random market fluctuations nor geopolitical orchestration.  The market pressures had been building for years, as one market event triggered another, leading inexorably to the carnage of Q4 2015.  In fact, there were thirty such market events, which are represented by dominos in the new book by Rusty Braziel, titled The Domino Effect now Amazon’s #1 bestselling book in four categories.  More dominoes will topple in 2016 and the years beyond.  This book is about understanding how and why the dominos have and will continue to fall based on an analysis of energy market fundamentals: prices, flows, infrastructure, value, and economics.  Today’s blog, an advertorial for the book, highlights some of the key aspects of The Domino Effect.

The Domino Effect by Rusty Braziel is now Amazon’s #1 selling book in four categories.

#1 in Books > Engineering & Transportation > Engineering > Energy Production > Fossil Fuels

#1 in Books > Business & Money > Industries > Energy & Mining > Oil & Energy

#1 in Kindle Store > Engineering & Transportation > Engineering > Petroleum

#1 in Kindle Store > Engineering & Transportation > Engineering > Chemical > Petrochemical

If you have been around the RBN blogosphere for a while, you know the domino effect concept is certainly nothing new.  We posted the first domino effect blog way back in April 2012 (see The Domino Effect: New Hydrocarbon Interdependencies).  It is no accident that we’ve come back to the concept many times over the years, and have used the domino effect as our unifying theme in the last four RBN School of Energy conferences.  The ideas behind The Domino Effect have been in the works for quite some time.  Now they have been stitched together in a coherent, straightforward explanation of what the Shale Revolution has done, and what will be happening next.

So what exactly is the domino effect?  At one level it is a simple, intuitive concept.  An energy market event is represented by a domino. Something happens, causing a domino to fall, striking another domino, which strikes another and so creates a chain of cascading events that can lead to unexpected consequences.  Some of the causal relationships seem obvious, particularly in hindsight. Others, like the collapse of crude oil prices in late 2014 were a surprise, if not a shock for many market participants.  In fact, if you look at today’s market from the perspective of a few years ago, there have been a lot of surprises --- U.S. petrochemicals have seen a renaissance and are building huge new plants to increase capacity.  Coal companies are turning out the lights as natural gas takes power generation market share.  Natural gas pipelines that moved gas from the Gulf Coast to the Northeast for decades are reversing and flowing gas the other way.  The fastest growing markets for U.S. energy supplies are exports.  Crude oil prices dropped by 60%.  And there have been many more seemingly unrelated developments in the energy markets that did not make the headlines.  But should they have really been that surprising?

All these developments may seem to have happened randomly, but not so.  There is a pattern here.  It is a pattern that not only ties these seemingly disparate events together, it reveals why this is much more than just another boom-bust cycle.  It is a transformational event for energy markets. 

The pattern not only helps explain why the Shale Revolution has evolved the way it has, but provides a framework for understanding how it is likely to play out in the future.  But that pattern is not just hanging out there for anyone to see.  Otherwise this whole thing would not have been so much of a surprise to so many people.  The pattern is obscured by the rush of market noise, misinformation and general ignorance about what really makes energy markets tick.

This pattern is the domino effect. 

The domino effect is a way of understanding what is going on in today’s energy markets.  It is defined by a sequence of market events, but it is explained by a set of principles that drive these events.  It applies across the markets for natural gas, natural gas liquids (NGLs) and crude oil.  In fact, it is the interrelationships across these three energy commodity groups that enables the chain of events that defines the domino effect.

The catalyst for launching the domino effect has been technology – more specifically the application of technologies that have made oil and gas drilling in shale and other tight oil and gas formations much more productive than in the past.  As we have discussed in many RBN blogs over the years, a single rig can now drill more wells, produce more hydrocarbons and do so at a much lower per-unit cost than was possible in the pre-shale era.  It is this improvement in productivity that has changed the landscape of energy markets.