The U.S. shale energy sector navigating domestic policies in a fragmenting global economy

The stated goal of the U.S. Energy Dominance Council is to support the U.S. energy sector by leveraging private-sector investments and bolstering U.S. energy independence, while also reducing energy prices. This study empirically examines economic and financial drivers, both domestic and global, of shale energy companies’ equity returns to provide sector-specific policy recommendations. Since the oil market is internationally connected, the shale energy sector is not insulated from the impact of geopolitical tensions. Hence, we also explore the impact of a variety of geopolitical risk measures in determining U.S. shale energy equity returns. We employ the Threshold Autoregressive (TAR) methodology to accommodate relationships that vary across different oil-price regimes. We conclude that support for the shale energy sector aimed at alleviating the impact of leverage costs (e.g., subsidies or reforms to the reserve-based lending framework) should be mostly limited to periods of low oil prices. Most oil-dependent economies establish stabilization funds to save oil proceeds during periods of high oil prices, with the savings intended to maintain aggregate consumption and government investment levels on rainy days, when oil prices are low. We propose that the U.S. government could consider this approach to smooth shale energy investments across regimes. In recent history, Saudi Arabia has been the ultimate winner of geopolitical events impacting its competitors in the global oil market. The novelty brought about by the 2022 Russia-Ukraine conflict is that geopolitical risk boosted the valuations of U.S. shale energy companies. • Borrowing costs harm U.S. shale energy returns primarily during low oil-price regimes. • Strategic support for shale should be restricted to bearish (contango) oil markets. • Increases in oil and gas aggregate production capacity diminish shale equity returns. • Geopolitical risk from the 2022 Russia-Ukraine war enhanced U.S. shale valuations. • The 2022 novelty is that shale, rather than the Saudis, benefited from geopolitical risk.