Energy sector recovery is still only flickering

Over the past several weeks, the oil and gas industry has looked for signs that a recovery from the two-year oil bust is at last underway and that the return to profits and prosperity is not far behind.

Analysts and executives have tracked crude prices, examined inventory and production levels, and scoured the abysmal second-quarter earnings in the energy sector. The growing consensus: The worst is probably over.

But that doesn’t mean conditions aren’t still bad, and won’t stay that way for a while. Even as the companies, workers, and local economies that depend on oil and gas dream of $70, $80 and — dare wesay it —$100-a-barrel oil, it is best that they settle in for a long, hard slog.

While analysts and executives focus on supply and demand, profits and losses, rig counts and job numbers, a simple fact often gets lost: The so-called shale revolution was a classic bubble. And when bubbles burst, cleaning upthe mess takes time.

To understand what lies ahead, just swap the word “oil” for “housing” or “dotcom.” Although completely different from energy, the housing and technology industries shared the same blend of chutzpah and hubris that have inflated speculative bubbles for centuries: the belief that prices would only go higher, that bets by investors and banks were all but a sure thing, and that newpara- digms had been discovered.

The perpetrators of the dot-com boom bragged they had repealed the business cycle, and fundamentals such as profit and loss had outlived their usefulness. The housing boom became a bubble when the masters of the universe — and those who bought their mortgage-backed securities — peddled the notion that they could allocate risk and hedge against it in such a way that the only worry washow to count the money. The shale boom was fueled by the idea that the world had an unending appetite for energy, no matter how much oil and gas was pumped.

History tells us what happened in the first two cases. When the dot-com bubble burst, the value of the techheavy Nasdaq Composite Index fell by more than half, and hundreds of thousands of tech workers lost jobs. It took 15 years for the Nasdaq to return to its March 2000 peak, and nearly that long for tech centers like Boston and San Francisco to recover all the jobs lost in that bust.

The effects of the housing crash are still fresh in most memories, after the worst re- cession in 70 years. Nationally, homeprices have yet to return to their 2006 peak, according to the widely respected S&P CoreLogic Case-Shiller Home Price Indices, which track real estate values in the country’s biggest metropolitan areas. Construction employment, meanwhile, remains more than 1 million jobs — or 14 percent — below the levels of a decade ago, according to the U.S. Labor Department.

It seems implausible that the energy industry should expect anything different. Bubbles are about excess, and recoveries are only achieved whenthose excesses are worked out. Just like U.S. households that borrowed against rising homevalues and spent moneylike they could always go back for more, energy companies must clean upbalance sheets, pay downdebt, and, in the wake of tighter credit conditions, finance their needs the hard way— with savings and cash.

All this takes time. Yes, evidence suggests that an oil and gas recovery is underway. But as history shows, it’s unlikely to be easy or fast.

The so-called shale revolution was a classic bubble. And when bubbles burst, cleaning up the mess takes time.