EconomicsDR. Maarten van Mourik
A preliminary investigation into the relationship between US Central Bank interest rates and US listed shale oil and gas producing companies free cash flow.
Drilling money into the ground
Written by Dr. Maarten van Mourik
This study investigates the existence of a quantitative relationship between the US central bank interest rate (Fed Funds rate) and the free cash flow of US based shale oil and gas producers over the period 2006-2020. The context is found in the observation that the so-called shale industry had not generated free cash flow, a measure of profitability and surplus value generation. The theoretical framework of the study is found in biophysical economics, which postulates that energy is the driving factor of the economy. In the so-called second half of the age of oil, the energy returns on the energy invested may be falling below threshold values.
This study provides a quantitative bridge between previous research that identified the relationship between cheap money and the growth of shale oil and gas production, and previous research that identified persistent negative free cash flow of the shale oil and gas industry. The findings suggest that the physical limits to productive output in our current economic structure may have been reached, or even surpassed and that this may be signalled from persistent negative free cash flow. Monetary policy may not be able to generate economic surplus when the marginal energy surplus is negative.
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