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The Biggest Energy Story Of The Next Generation

The Biggest Energy Story of the Next Generation Unfolds Before Our Eyes By Van Tharp International Institute of Trading Mastery

Get ready for shock and awe.

The energy chart I'm going to share with you below is the most startling one that I've seen in quite some time. And unfortunately for our alternative energy friends out there, it has nothing to do with solar, wind or geothermal energy (or battery companies that continue to go bankrupt). Despite heavy government subsidies, most of the alternative energy sources being chased now will not reach a point of unsubsidized economic viability in our lifetime (if ever).

The bottom line for long-suffering alternative energy supporters is this: you're going to have to suffer a while longer. As long as we have cost efficient ways to get fossil fuels out of the ground, their ease of use and energy density will win the economic argument-by a lot-every time.

And now we have new cost efficient ways to get gas and oil out of shale rock formations that was previously unreachable. Not only are these new methods releasing lot of energy, the huge untapped reserves in these formations are going to provide us lots of fossil fuel for years to come. Plus, the technology for getting at those reserves is improving almost by the day.

For this article series, I get to hearken back to my chemical engineering training. The name of the game for the next generation is getting more oil (and natural gas) out of the ground. And the reason is very simple: you can't cheat the laws of physics. Or in this particular case, you can't beat the energy density of good old-fashioned fossil fuels. And now it seem like we aren't going to run out anytime soon.

Peak Oil and New Assumptions

"Peak oil" is a popular theory that had analysts predicting the approaching end of the fossil fuel era. Then again, they only considered the oil you could pull from the earth by sticking a glorified straw into the sandy ground of West Texas or the Middle East. (Peak oil theorist M. King Hubbert predicted a peak of oil production that would lead to a perilous production decline ending in replacement of oil as an energy source.) Many thought the peak had already occurred because global production had not exceeded the record year in 2005. Now, however, those folks are changing their tune - 2011 global production exceeded 2005 levels. Of course we will get to peak oil at some point in the future but for now, there has been a production surge because of new extraction technologies for shale deposits, tar sands and deepwater deposits.

North America is leading the way in this energy revolution. Oil from Middle East land-based wells is still the easiest to extract and therefore the cheapest to produce, but conventional onshore production has been declining since about 2005. This can be seen in the graph below where the dark blue bars are dropping year-to-year

Global Oil Production

But that's not the shock and awe chart (it's still to come…). If we look at the chart above carefully, you see a little sliver of yellow that has been growing over the last decade - onshore unconventional production. That's stuff like tar sands and shale oil. For shale oil extraction in particular, the technology is getting better quicker and production is increasing by leaps and bounds. In fact, this is one of the few areas where prognosticators have under-estimated growth rates.

So, without further ado, sink your teeth into the chart below that shows crude oil production out of North Dakota. This chart is straight out of the U.S. Energy Information Administration website:

North Dakota Field Product of Crude Oil

Where to From Here?

While oil from conventional extraction is dropping, the severity of the up sloping production curve in the chart above is startling - from January 2005 until August 2012 (the last month of reported data), production is up 739%! The increase in production in the Bakken region, combined with rosy prospects elsewhere in the country have led Raymond James energy analysts to estimate that U.S. domestic production will rise by 3.5 million barrels - per day(!) over the next 2.5-3 years. That would mean the U.S. would jump from producing about 28% of its own consumption up to almost 50%. While reducing U.S. foreign oil dependence may have geopolitical significance, this development is a massively important economic development also. The math is pretty simple: 3,500,000 barrels/day * 365 days/year * $88 per barrel = $112 billion per year. This alone would erase almost 25% of our current trade imbalance.

The energy game is changing - and while political unrest and other outside forces can temporarily disrupt oil prices, the longer term play in oil, as I stated emphatically in March of 2012, is still to the downside.

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