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The End of Peak Oil?

550% Gains from the Shale Revolution

Written by Briton Ryle
Posted April 4, 2013

Just a few years ago, as the price of oil spiked to $147 a barrel, the notion that the world was pumping as much oil as possible — that we had reached Peak Oil — was becoming an accepted fact.

After all, as prices rose, wouldn't it benefit oil producers to produce more oil if they could?

But global production could only rise around 10% between 2000 and 2010. In the United States, production declined steadily from 2000 (5.8 million barrels) to 2008 (4.9 million barrels).

The inability to bring more oil to market despite a huge economic incentive to do so was surely proof the world simply couldn't pump more oil.

And so, with emerging market demand surging, all sorts of doomsday scenarios about the end of industrialized society made the rounds. The world would return to an agrarian economy. Buy farm land! Better learn to ride a horse...

These predictions made a little sense, as there's basically no replacement for fossil fuels in terms of concentrated energy. A barrel of biofuel just doesn't pack the same punch as a barrel of oil. There's no substitute.

But this was all before the Shale Revolution.

“The surge in U.S. production clearly indicates that human ingenuity is rising to the challenge issued by long-time oil bulls."

On February 14, Citigroup declared the death of oil production gains was greatly exaggerated. “U.S. oil production is now on the rise, entirely because of shale oil production.”

Shale oil could add almost 3.5 million barrels a day to U.S. oil production between 2010 and 2022 — and has already slashed one million barrels a day from U.S. oil imports.

The U.S. pumped around seven million barrels of oil a day in 2012. By 2014, that number will be over eight million barrels a day. The last time U.S. production was that high was 1988.

As a Wealth Daily reader, you know the Shale Oil story as well as anyone. You know about the incredible growth of North Dakota's Bakken. You know about the resurgent Permian Basin in Texas. And you know the major shale gas regions, too: Marcellus, Barnett, and Haynesville.

And if you've been following Angel Publishing for a while, you've had the opportunity to profit from our oil and gas stock recommendations...

But if the U.S. is suddenly awash in oil and natural gas, won't that result in lower prices — and lower stock prices, as a result?

Innovation and Deflation

Yesterday the weekly oil inventory showed a 2.71 million barrel gain in the amount of oil the United States has in storage. The total is now 338 million barrels. At 18.5 million barrels a day, that's an 18-day supply — the largest supply since 1990.

Now, that 18.5 million barrels a day figure is extremely important. That's how much oil the U.S. consumed every day in 2012. That's the lowest daily average for oil consumption since 1996. U.S. oil consumption peaked between 2004 and 2007, when the average was above 20 million barrels a day.

America is producing more and using less.

The reason for this is precisely what Citigroup pointed out: innovation and ingenuity.

North Dakota's Bakken is the poster child for drilling innovation. The Bakken's light, sweet shale oil has been on the radar for 60 years.

Shell Oil drilled a few wells there, but they only averaged around 50 barrels a day until 1964, when they were abandoned. Meridian Oil is credited with the first horizontal well in 1987, producing around 144 bopd in 1990... but it wasn't until 2004 that Continental Resources combined horizontal drilling and hydraulic fracturing to create the first commercially viable Bakken well.

550% Gains from the Shale Revolution

We are in the early stages of an energy revolution. Horizontal fracking techniques have opened up oil and natural gas supplies that were unthinkable less than 10 years ago. And we're using less fuel, as cars become increasingly fuel efficient and trucking fleets transition to natural gas.

Natural gas prices have been crushed by innovation, while oil prices have not. And there's a very good reason for this: infrastructure.

America is built for oil. It's not built for natural gas — yet. But that's quickly changing, as the cost advantage and supply of nat gas provide a strong incentive...

Why Prices Will Stay Strong — and What You Can Do about It

I've seen some analysts call for a collapse in oil prices due to supply and demand issues. Some say oil could fall into the $40s. That's baloney.

Bakken oil costs between $60 and $70 a barrel to produce. And because there are few pipelines to the region, shipping by rail costs another $15 a barrel or so. Right there, you've got a floor of $75.

And because oil use is a fixture of the U.S. economy, there's little risk of production going offline in response to weaker prices.

The situation is a bit different for nat gas, where supply has pushed prices down to the point where wells become uneconomical. But even that is changing.

I'll tell you right now that we've seen the lows for natural gas, and there is a high probability that we'll see nat gas back in the $5 range in the next 12 months.

Warren Buffett is reportedly testing nat gas locomotives for his railroad. Companies like Westport (NASDAQ: WPRT) and Cummins (NYSE: CMI) are pioneering natural gas engines for cars and trucks. T. Boone Pickens' Clean Energy (NASDAQ: CLNE) is building the nat gas filling stations, and General Electric is the market leader for nat gas turbines in factories...

This revolution is happening now.

And it will continue for 20 years, at least.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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