Publications

- July 1, 2017: Vol. 4, Number 7

Texas Tea Runneth Over: As underscored at the Mick Law energy conference, Mother Earth is far from done with fossil fuels

by Mike Consol

After decades of predictions that “peak oil” had been reached (the hypothetical point in time when the global production of oil reaches its maximum rate), the earth is now gushing fossil fuels more bountifully than ever. There is much more oil trapped in the earth’s crust than many had believed — or than we could get to in years past. Now, with hydraulic fracturing technology, the earth is surrendering its oil and gas in record amounts.

Even as alternative forms of energy have gained momentum through technology advances and a public policy preference for clean energy sources, there will need to be $11 trillion in oil and gas investments to meet fossil fuel demand over just the next 20 years, according to forecasts by Exxon.

That was music to the ears of the sponsors and investors at the Mick Law Energy & Global Alts Symposium in oil-rich Dallas on June 4–6, where oil and gas drillers and related companies put forth a host of investment programs for energy investors. Dan Steffens, founder and president of Energy Prospectus Group, kicked off the conference by putting on the display screen a list of countries with known reserves as of 2005, and Venezuela topped the list with just over 300 billion barrels of oil within its borders, followed by Saudi Arabia with 261 billion barrels, Canada (172 billion) and Iran (158 billion). As of that accounting, the United States had 55 billion barrels, which Steffens said has probably doubled since 2005 and is well over 100 billion U.S. barrels today, thanks to our newfound ability to wring the precious liquid loose from shale basins around the United States.

The economies of entire nations float upon the riches of black gold. All this oil and gas exploration and exploitation, and yet only 25 percent of world’s population has electricity around the clock, while 2 billion people have it only a few hours per day, and more than 1 billion have zero access to energy.

Astounding. Consider yourself blessed to have been born in an economically developed country. We do not think about that much, in part because the world is awash in oil and natural gas these days, at very affordable prices.

We have come a long way since OPEC was formed in Baghdad in 1960 and delivered a shock to the oil market in the 1970s when the cartel cut production and triggered a fourfold rise in the price per barrel. OPEC, which now consists of 14 member countries controlling about 45 percent of global oil production and holding about 70 percent of the world’s proven oil reserves, was created with the stated mission of ensuring stabilization of oil markets. Put more skeptically, the cartel is in the business of keeping oil prices plump, so their one-commodity economies can continue to prosper from this natural resource.

Then along come U.S. drillers with their hydraulic fracturing technology, vastly expanding access to the domestic oil supply, heretofore trapped in shale basins. Suddenly the United States had achieved something that previously seemed out of grasp: energy independence. U.S. oil production peaked at 9.61 million barrels per day, and Big Oil is even exporting to other countries these days, having finally convinced Congress to lift the embargo on oil exports by U.S. companies.

This new bounty of oil was so plentiful it drove down prices that had been pumped up to well over $100 per barrel just a handful of years ago. OPEC cranked its taps wide open, flooding the market with supply in hopes of driving prices down for long enough to drive small-scale U.S. drillers out of business (though more recently OPEC has cut production in an effort to buttress prices). But our domestic drillers have proved a resilient lot and survived the OPEC onslaught. They are certainly not making money hand-over-fist, and the opportunity for returns for the oil and gas investment community have thinned, but reliably low oil prices have been a boon for manufacturers, airlines, shippers and other companies.

The John Henry Oil Corp., with CEO Connie Love, a third-generation driller at the helm, reports that its operations can break-even on per-barrel oil prices of less than $20. She spoke at the Mick Law Energy & Global Alts Symposium, offering oil plays for a minimum of just $25,000 on a modest fundraise of $10 million. Other drillers at the symposium included operators such as Mewbourne Oil Co., MDS Energy Development and APX Energy.

Steffens said the Saudis took probably the biggest gamble in energy history and it cost them $200 billion to $300 billion. While small U.S. oil companies have met the challenge, settled in and proved worthy for the long haul, it can fairly be said that Saudi officials are in a panic, as the regime’s one-industry economy shrivels. All that oil was converted into all those riches for all these years and, in many cases, it has not been parlayed into new industries and a diversified economy.

The world’s economies run on energy, chiefly oil, and that had lulled some oil- producing and exporting countries into a mirage that the party would go on endlessly. All is certainly not lost for some of these underdeveloped countries or for U.S. oil and gas investors. As Steffens said, oil is critical to our functioning, so prices have to rebound or we sacrifice our standard of living. Oil demand will continue to grow for decades, he says, as the size of the pie keeps getting bigger.

So much for peak oil.

Mike Consol (mconsol@irei.com) is editor if Real Assets Adviser.

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