Cheap energy is the key to productivity. Where the cost of energy is lower, productivity is greater. This is true worldwide. We begin by looking at energy costs and production in the USA.
The Presidential Debate - Candidates Agree on Gas & Oil
Last night the third and final debate between Romney and Obama took place. What was interesting was their agreement that US production of gas and oil is increasing at a rapid rate. Their calculations were slightly different, and their positions on why this is happening differed, but they agree that US reserves were growing at a rapid rate, that there were more reserves now than every before, and that there were bountiful supplies coming on stream.
This is the final nail in the coffin of The Peak Oil Theory.
The supplies of natural gas are growing at such a rapid rate, that the price of gas dropped dramatically and is staying in the $3 to $4 range. Monthly Dry Shale Gas Production as an example has risen from approximately 10 billion cubic feet per day in January 2010, to roughly 25 billion cubic feet per day in September 2012. This is an enormous increase of about 250% in only 21 months. Quite staggering actually.
The average Henry Hub spot price which was about $6 in 2007, and reached roughly $13 in 2008, now trades in the $3 range. Supplies are now longer the problem. Demand is now the problem with explorers and producers cutting back on drilling because of oversupply and low demand. No-one thought this would happen in our lifetimes.
US Oil Costs
October 24, 2012 On the market today, oil prices were trading below $86 a barrel, poised for the fifth straight session of declines.
Monthly Energy Review
One of the more interesting items buried in the Monthly Energy Review from the EIA (full report here) is the fact that U.S. crude oil production for the lower 48 states is estimated to have reached a 23-year high in June of 5.74 million barrels per day. The last time 5.76 barrels of oil were produced daily was in 1989, 23 years ago.
During the first half of 2012, the EIA estimates that oil production in the non-Alaska states increased almost 13% compared to the same period last year, boosted by the strong, ongoing gains in North Dakota shale oil (+67% year-to-date through May) and Texas shale oil (+17% year-to-date through May). Thanks to advances in technology (fracking and horizontal drilling), domestic oil production has been increasing since 2010
What Does This Mean?
The Presidential race is one of rhetoric and bluster, as if the president has the power of Job. The reality is that what has changed the landscape in the production of cheap energy, is technological advancement that was unheard of a few years ago. As I have repeated so many times in previous blogs, economic cycles rise and fall and each is triggered by events or trends. It seems that the cause of the next economic cycle may be cheaper energy.
But This is Not the End, It is Only the Beginning
There are a number of public companies and others who claim new technologies to increase production dramatically from existing sources. These include:
- using microbes to vastly increase recovery from old oil wells and existing reservoirs already in production.
- Wavefront Technology Solutions makes tools that dramatically increase oil production from water floods. The technology, which has been used by Encana, BP, Chevron and most recently the national oil company of Oman, produces a pulse to dramatically improve the effects of a water flood.
- Enhanced Oil Recovery (abbreviated EOR) is a generic term for techniques for increasing the amount of crude oil that can be extracted from an oil field. Using EOR, 30 to 60 percent or more of the reservoir's original oil can be extracted, compared with 20 to 40 percent using primary and secondary recovery.
And so on. The explosion of technology in this area is impressive and continuing.
Productivity is the Result
The US is now the world leader in these technologies and is rapidly becoming self sufficient in energy. Oil imports are dropping continually and natural gas exports are projected to increase dramatically.
Plunging natural gas prices have turned the U.S. into one of the most profitable places in the world to make chemicals and fertilizer, spurring hopes for an industrial renaissance. In Beaver County, Pa. A proposed multi-billion dollar Royal Dutch Shell would be the first such plant built in the U.S. in more than a decade.
Alaska wants a $50 billion pipeline and export complex built to develop natural gas that's stranded on its icy North Slope. Governor Sean Parnell gave ConocoPhillips to the end of this month to provide plans to pipe natural gas south and condense it into a liquid, known as LNG, for export. The joint venture would compete with growing global supplies of LNG coming into markets. Asian gas buyers as of July paid almost 6x the futures price in the U.S., where prices are depressed by the shale boom.
The Long View
The US economy is poised to have a boom in manufacturing because of cheap energy. Labor costs in the US have dropped dramatically and although this is painful for the workers, the competitiveness of the US is dramatically increasing. Cheaper energy, cheaper labor, and more incentives for business, will bring the next monster wave of prosperity.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.