carbonates

Fossil Fuels vs. Green Energy: What's a Better Investment?

I wrote a long comment, and then lost it to the vagaries of the log-in page. In summation, I do not believe that alternative energy stocks can do well UNTIL oil and gas stocks are doing well again. The warm fuzzy thinkers that love alternative energy for its political spin seldom stop to realize that the health of the alternative energy market is very much tied to the price of oil and gas. Until the oil and gas sector gets over the flu, alternative energy will continue to have pneumonia. The decision is if you want to invest in businesses that still show a profit, or businesses that were only profitable for a short period in the past.

The other comment I have is that while demand destruction was a significant factor early in the decline of energy prices, it is no longer an important factor. The new problem, and what will drive prices upward as the economy inches upward, will be supply destruction in oil and gas. The current low prices will destroy much of the planned supply additions (exploration projects) that were being put together over the past two years of rising prices. The next cycle in oil and gas is likely to be much more extreme, while it may be a recession away.

The plans of Obama to tax "windfall" profits of oil and gas producers in the US may be dashed, suggesting his proposed economic support for the alternative energy sector may also never come to pass. I don't expect profits of the oil and gas sector to remain high after the forward selling of oil and gas that many producers have utilized run out. By 1st Quarter '09 this profit will be gone. Natural gas producers in the US are going to be particularly hard hit, especially in the marginal resource plays, as production this year is up almost 10%, and if demand does not go up, they will be forced to either cut production or produce at lower margins. Not even T. Boone Pickens will be able to change this market, as his ideas, while excellent, depend on building infrastructure that will take years.

Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy

Okay, Fearing, I'll take the bait. By your logic I should stop drilling in the US, as the US production is going into decline anyway. That's fine with me. I can take my skill set to Saudi Arabia and get paid more anyway. My quality of life will decline slightly, but my personal finances will be greatly improved by reductions in taxes and higher income. My work will be slightly easier, because I will not have to deal with any sort of environmental standards, and even fewer regulatory hurdles. You will still be paying my higher salary (but you will be receiving far less of my income in the form of taxation), so it makes little difference to me. I could have provided my services inside the US, creating high paying jobs and huge amounts of tax revenue in the US, but it seems you feel you would be better off to buy imported oil. By the way, the MMS is the second largest source of revenue to the Federal government behind income taxes. As US oil production declines, your tax rates will increase.

Likewise, I can shift my investment portfolio from US oil producers to foreign producers that will benefit from having a larger market share in the US. As US production goes into even higher declines, oil will no doubt go higher and I will continue to benefit in my portfolio. I can even start collecting my paycheck in Euros or Swiss francs!

Also inherent in your position is the shift away from environmentally responsible oil and gas production within a strongly regulated framework, to production in areas where there is no environmental regulation. Russia still considers plowing on-shore oil spills under with a tractor to be "spill remediation." Other countries I have worked in tolerate lakes covered with 12 inches of oil as the cost of doing business. Your attitude only supports this lack of responsibility and will hasten the decline of the worldwide environment.

Meanwhile, you seem to suggest the US stop using oil, or alternatively import more oil, as for some reason drilling seems to upset you. You would prefer to take the point of view that since we can't produce all of what we need, we should not even try.

I can easily change the way I live. It will not be beneficial to you however, but will be very beneficial to me. Can you change the way you live? Call me an idiot, but at least I have a positive suggestion on how to make the transition to renewable energy and alternative raw materials that will be needed to replace oil and gas. As is often repeated quietly in the oil industry "you can all go freeze in the dark" if you don't want my help. I'm not the cause of your digestive problems.

Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy

Yet another example of how your premise is so WRONG, North Dakota, which has also experienced new levels of drilling activity in the past couple of years, is setting new records of oil production (natural gas is NOT included in these numbers). North Dakota produced 5,324,274 bbls of oil for the month of July compared to the 4,985,773 bbls of oil produced a month earlier. These are all-time high levels for North Dakota, and the direct result of DRILLING. Proven reserves for North Dakota are on the upswing, showing that through effective modern exploration it IS possible to reverse long-term declines. Both new engineering technology and new geologic concepts made it possible to recover tremendous amounts of oil from the Bakken, which has been drilled through and ignored for decades. Many more examples exist, and the new wave of oil drilling is only beginning to be apparent to the investing community and even much of the oil industry. You know very little about what you are talking about.

EOG Resources, the principal operator of Parshall field, reported production of 854,119 bbls of oil from 53 wells in July. NONE of these wells existed two years ago.

Large percentages of these new record production levels in North Dakota are being produced from Federal leases. This is something you would have us stop leasing, since apparently 5 million barrels a month isn't enough to matter to you. At only $100 per barrel, that translates into $500 million dollars of revenue that went into the US economy; new wealth created by US oil companies, and money that was NOT part of the US trade deficit. That $500 million of revenue also may have provided as much as 12 1/2 percent of the gross revenue (the Federal royalty payment) to Federal tax coffers, effectively reducing the need to tax US taxpayers by millions of dollars (which would have been needed if we had bought imported oil instead.)

You really need to rethink your numbers.

Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy

Okay, record rig counts this year in the US have only produced 8% year on year production increases in natural gas, creating the possibility of lower natural gas prices for some time to come. Most of those wells were not even planned over two years ago. Many of them weren't even planned a year ago. Current estimates of total natural gas reserves in the US are up dramatically from only a year ago.

I think your premise is radically WRONG. It seems to me the facts are already there to support more drilling as both a way to increase domestic production, drive down prices for hydrocarbons (already happening for natural gas), and reduce the trade deficit. Increases in production this year certainly support that. You don't seem to understand that the period you are using to prove your data includes significant periods of oil prices near $12 a barrel and longer periods below $25. Next you are going to tell me that having sex does not lead to more babies.

I think you've done a good job of choosing your data in such a way that it matches your hypothesis. As an exploration geologist, I disagree with most of your "facts."

The Oil Bubble Will Meet the Same Fate as Tech, Housing

Unfortunately the facts (supply, demand, known reserves, production declines) don't really support your premise. Sure, demand destruction is likely, at least in the short term, but it is only a matter of time before production declines cause another supply crunch. This is real, folks. Take it from a geologist.