The shale boom? It looks a lot like the dot com bubble, not the financial crisis sock puppet bubble

Wikimedia Commons

The sock puppet, one of the most iconic symbols from the dot com bubble.

Earlier this week, Greenlight Capital founder David Einhorn came out swinging against the shale oil industry.

At a presentation Monday, Einhorn said, "We [Greenlight] object to oil fracking because the investment can contaminate returns."

Basically, oil companies spend too much money on capital expenditures, and with low oil prices they aren't seeing the returns that they need to justify this spending.Advertisement

Writing in the FT on Wednesday, Ed Crooks says he thinks Einhorn is largely correct:

His broadside had three principal elements. First, he criticised earnings reporting by oil companies, especially bespoke measures such as Ebitdax, which "basically stands for earnings before a lot of stuff".

Second, focusing on cash as a more reliable guide to the true health of the industry, he highlighted how the large shale producers had since 2006 spent $80bn more in acquiring and developing reserves than they have made from selling oil. They were kept in business only by a constant inflow of capital.

Third, he observed that investors who believe oil prices are going to rise would do better to invest in the commodity itself than in shale producers' shares.

However. Crooks doesn't think that we're headed for a Lehmen-like financial crisis as a result. Instead, he thinks this is more like the dotcom boom, where the market got really overheated, but the underlying technological progress was sound, so the industry eventually came back. Advertisement

Crooks again:

As in any commodity business, the decisive factor will be costs. If shale production is more expensive than other sources of oil, it will not survive, and producers need to be able to undercut other high-cost areas such as Brazil's deep water and Canada's oil sands. Lower-cost shale producers can be the Amazon and Google of this new world; the higher-cost ones will be

The key, then, is to be that company figuring out how to do shale oil on the cheap (well, relatively).Advertisement

Read Crooks' full piece at the FT here »

NOW WATCH: Here's what happens when you get bitten by a black widow