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The Shale Oil Boom



October 16, 2013 – Comments (0)

Board: Macro Economics

Author: saunafool

For those of you who have followed my posts in the past, I am on record saying that the Shale Oil boom is a game changer. It is already dramatically changing the U.S. energy landscape and will continue to do so through at least the end of the decade (and probably at least through 2030). From my first posts on this subject a couple of years ago, actual results have been better than some of the most optimistic predictions and predictions of future production from shale wells have become more clear.

At the link you will find an easy to read paper highlighting the Shale Oil potential of the United States.

Key Points:
* Shale oil production should reach 5 million bpd by 2017 (barrels per day) compared to 2 million bpd currently.
* Keep in mind, the above is up from roughly zero in 2007.
* By then, the U.S. will be the #1 oil producer in the world
* These increases will likely be limited to the U.S. for a variety of commercial and technological factors--availability of horizontal drilling rigs and fracking equipment, combined with low population density.
* This implies that oil imports will fall to only about 25-30% of domestic oil supplies (down from nearly 70% in 2005--2007).
* The above production will come almost exclusively from increased production in the 3 regions which are already successfully producing--Bakken, Eagle Ford, and Permian Basin.
* Future production increases are likely from other shale formations with Monterrey in California and Utica in Ohio and surrounding states showing early potential to be on the same scale as Bakken and Eagle Ford. About 5 other shale formations are also being explored.

There are a number of skeptics who claim there is a "Red Queen" problem with shale oil development--that you have to drill more and more wells to keep up with production. It is true, but the skeptics are claiming that shale oil production will peak in the very near term. Yet, due to the huge size of these formations, there is enough potential to increase the number of wells and increase production (albeit not at the current torrent pace of production increase) until at least the late 2020's.

The real significant threat which will almost undoubtedly end this oil boom someday is the same thing that has always ended oil booms--falling prices. If prices fall significantly, the nature of shale oil wells is such that drilling activity can stop quickly. If prices fall below $50/bbl, the spigots will simply shut down until prices recover.

That is exactly the problem we want to have.

From an investment and METAR perspective, this is my take away. Through the end of the decade, oil prices are far more likely to fall than rise, and natural gas prices in the U.S. will remain among the lowest in the world (because there is generally some gas and NGL--natural gas liquids--produced along with the oil). The cheap oil and gas are going to drive a wide range of U.S. manufacturing from very clear advantages of cheap feed stock for U.S. based petrochemical manufacturers to overall lower energy prices compared to other manufacturing regions--Europe and Asia.


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