James Dondero has become one of Texas’s most well-known entrepreneurs. After having founded Highland Capital Managment in 1993, Dondero has gone on to have a stellar career as a member of the board of various large financial institutions and as the head of his own hedge fund. After becoming an early player in the collateralized loan obligation industry, Dondero went on to prove the concept of syndicated debt, leading to the creation of one of the largest financial markets in the country today.
But James Dondero has also been an investor in the oil industry and a close observer of oil markets worldwide. In a 2015 piece for the Huffington Post, Dondero predicted that the low prices of oil would not last for much longer. Although he did not specify the period of time after which he believed prices would begin to inexorably rise, he did say that he believed various factors would lead to long-term increases in the price of crude oil.
Some of those reasons have proven to be prophetic. For example, Dondero cites the state of the Venezuelan economy, which, at that time, was considerably better than it is today. Currently, Venezuela is in a state of virtual bankruptcy, after already having missed a number of interest payments on its rapidly spiraling debt. So bad is the state of the country’s economic affairs, it cannot even afford to pay the basic costs of production, shipping and infrastructure for its lucrative oil trade.
Another factor that Dondero cited in his article was the fact that most of America’s production comes from hydraulic fracturing and other techniques that require a high per-barrel price of oil in order to be profitable. However, Dondero probably could not have foreseen the dramatic drop in costs associated with hydraulic fracturing. Today, many rigs operating on the Bakken Shale formation of North Dakota are able to produce at 40 percent less cost than they were even two years ago. This is largely the result of technological innovation, including the ability to operate multi drill platforms, rigs that are capable of simultaneously drilling up to 18 wells at a time. This results in dramatic increases in efficiency and economies of scale.