Posted on July 4, 2023
Hydraulic fracturing has transformed the shape of world energy markets, turning the US into the world’s top oil producer. But what is less well known, outside the energy industry, is that it did this largely without making any money.
For most of the last 30 years, fracking companies have earned below their cost of capital. Every time the industry has looked to be getting close to profitable, its own success has put the ceiling on the market, bringing energy costs back down. There is a lesson there for commodity producers. No matter what your demand forecast is, if you can’t get out of the right-hand side of the cost curve, you will eventually find yourself out of the money.
This is a lesson that investors should be mindful of, as the mining industry seems to be experiencing one of the periodic resurgences of interest in deep sea minerals.
The strange story of the Glomar Explorer
The history of deep sea mining is one of long periods of inactivity, punctuated by brief episodes of exuberance, which usually last just long enough for serious money to be lost. The first such boom was triggered in 1974, as the mining ship Glomar Explorer, owned by tycoon Howard Hughes, began operations in the Pacific Ocean, purportedly in search of polymetallic nodules.