I didn’t really pay much attention to the US elections a few months ago, but
what I did hear which interested me were the blatant lies/propaganda that both
sides were saying about energy and oil. This of course caught my attention. Romney
in particular pressed on that we’re about to have a ‘Shale revolution’ and that
the US will be oil sufficient within 5 years and that the US has about 500 years’
worth of Shale gas. Now Shale gas has been a favourite topic of investors, commentators
and mainstream analysts – many of whom claim we are about to enter a new energy
era with cheap and abundant Shale gas leading the charge. So is Shale going to
be the wonder energy to replace crude oil and save us from our ‘Peak Energy
Cliff’? Or is this just going to be another bubble? So to save you the effort,
I’ve been quietly doing my due diligence into this sector for about a year now
and on closer examination of these incredible claims/figures and things just
don’t add up. So we’ll quickly go through:
•
Shale…how goes it.
•
Why Japan can’t afford to abandon nuclear power.
•
Why green energy won’t make a meaningful impact for many years.
•
Why Romney and Obama know next to nothing about fossil fuel energy.
So
how are things shaping up for Shale at the moment?
Well
a lot of investors from particularly the oil-rich parts have been making some
pretty high-risk investments in the United States for many years and, for a
long time, those investments were in real estate. As we know, a lot of people/organisations
got burned with US real estate in 2008 so now a lot of these investors have
shifted their focus and are putting funds into Shale. There are 3 pertinent
things going on here:
i.)
This
capital isn't going to last forever, especially since Shale gas is a commercial
failure. Shale gas has lost hundreds of billions of dollars and investors will
not keep on pumping money into something that doesn’t generate a return. These
type of investors aren’t ‘day traders’ but they definitely don’t invest like
Warren Buffett (buy/invest and hold forever). They’re in this for profit/capital
appreciation/dividends and cashflow. Shale isn’t providing any of them at the
moment other than hope and potential.
ii.)
People
always ignore the decline rates that Shale reservoirs experience. Well, I've
looked at this and the decline rates are incredibly high. In the Eagleford Shale,
which is supposed to be the mother of all Shale oil plays, the annual decline
rate is higher than 42%. That means they're going to have to drill hundreds, if
not 1000 wells in the Eagleford Shale, every year, to keep production flat. Just for one play, we're talking
about £6-8 Billion a year just to replace supply. When you add all these things
up and it starts to approach the amount of money needed to bail out the banking
industry, where is that money going to come from? The Fed certainly isn’t going
to print it for them. They’ve got their balance sheets full already buying
toxic T-bonds that the world is now shying away from.
iii.)
Quantity
vs quality. Yes there may well be 500 years’ worth of Shale in Northern
America, but how good is it? I.e. How many joules of energy do you get back for
every joule you put in to extract it? If we go back 100 years to the Goa fields
of Arabia, the sweet crude they got there gave them about 99 joules back, per joule
spent. Where are we now? Crude right now is only giving back about 6 joules if
we’re lucky. Shale? 2 – 2.5. How long will Shale last where it’s economically
feasible to do so?
So
on the outset, things don’t look too peachy for Shale at the moment. And with
all of this hype that’s constantly bounded around about Shale, especially now
that Romney and Obama were talking about it, I’m afraid that this is looking
prime for becoming a bubble.
How
quickly could this bubble pop?
Well,
it depends, as with all collapses, on how quickly the collapse occurs. The
worst-case scenario would be that several large companies find themselves in
financial distress. A large company called Chesapeake Energy recently had a very
close call. They had to sell billions of dollars’ worth of assets just to
maintain paying their obligations. So if this can happen to Chesapeake, it’s
highly probably that if a couple of big bankruptcies occur, these investors
will pull back, all the money evaporates, all the capital goes away. Goodbye Shale.
For the time being anyway. But of course, that’s the worst case scenario and no
one has a crystal ball, but this is a probable outcome. Am I putting my own
money on the table? No, not yet. I won’t be shorting it either, but it’s
definitely something to keep an eye on. I’m currently all-in on Silver at the
moment.
If Shale
had its 15 minutes of fame in the US elections, surely there must be some
substance behind it?
Mitt
Romney really pushed and talked about how the US would be able to achieve
energy independence in 5 years. Well, I know he’s a big deal over there and I’m
an average Joe in Norwich, but that's simply poppycock. Anybody who knows
anything about oil, gas and coal, knows that that's absurd. The US were
producing a little over 6 million barrels a day thanks to an all-out effort in
the Shale oil play. But the US consumes 15
million barrels of oil a day and that leaves the gap of 9 million barrels per day. At the peak
of US production in 1970s, they only produced 10.6 million barrels per day. So
I’m afraid he really doesn’t know what he's talking about, or he was just
willing to say anything to get the votes.
So
if not Shale, what about Nuclear energy then? Should we ditch it like Japan and
Germany?
No.
I’m not a nuclear expert, but from my research, Japan is a special case. For a
start, the Fukushima reactor was right on top of a major fault line. So, that seems
to be an incredibly dumb place to put it. And to completely abandon nuclear
power because one reactor was stupidly planned, to me, seems like a bit of a
knee-jerk reaction. But who knows what’s going on behind the scenes in the
Japanese government. Their currency is crashing, they’re on QE9, they’ve been
hit full on with a natural disaster and the economy has declined for over a
decade now. And here are the bones of Japan’s situation:
i.)
They
have no oil.
ii.)
They
have no coal.
iii.)
They
have no natural gas.
So
if they get rid of nuclear energy, what are they going to do? I don’t know why
no one’s really asking this question? If you don't have anything of your own,
how are you going to get what you need? The answer is that they have to import
LNG and that's very expensive. Right now, natural gas is selling in Japan for
$17 per million BTUs (British Thermal Units). You can buy the same BTUs in
Europe for $9 today or in the US for $3. They’ve also started piling billions
of Dollars into Solar energy (which is great for Silver prices), but the energy
provided from that barely compares to the power that their nuclear plants
produce. It’s like trying to power a car with a hamster wheel.
So
that brings us nicely to Germany and for them to abandon nuclear…that decision
is truly delusional because they haven't had any problems over there. Nor is
Germany particularly earthquake or tsunami prone. They have forced themselves
into a love relationship with Russia so I think that either I’m missing a big
piece of the puzzle here or there are deals going on there hidden from public
view. And with the dodgy track record of these Russian oligarchs, that doesn’t
seem that crazy. Just follow the money…
So
what about renewable energy sources then? And what about future technology?
Now I
have all the enthusiasm and hope for technology as we humans are pretty clever.
But a good rule of thumb that I heard once is that if it's not on the shelf
today, then a solution is no sooner than 10 years in the future. So, when people
talk about fancy algae, storm energy harnessers and A Rossi’s E-cat machine,
just bear in mind that it's not on the shelf today. So yes, eventually we’re
going to have some ingenious solutions, especially with the discoveries of Graphene
and Silicene, but simply nothing is going to help us in the coming 5-10 years.
Whilst
we’re on the topic of energy, something that slightly annoys me is that environmentalists
talk about the evil of fossil fuels and the carbon emissions that they produce
etc, but have they really done their research to see how vital it is to pretty
much everything that we base our modern lives upon? For instance, pretty much
97% of any goods or products revolve around trucks and lorries. The food in
your fridge, the fridge itself, your newspaper reading glasses and pretty much
every object you can think of has been created using oil and delivered to you by
oil (diesel). So I’m afraid we as a species is hooked on oil and our dealer
(Earth) is rapidly running out of supply. In my opinion, prices for anything
tangible like Gold, Silver, Timber, Gas, Oil and also renewables can only rise in
the medium to long term. These are great prospects if you’re an investor or
newbie investor.
I’m
aware that Governments have the best and brightest advisors who know a lot more
about their respective fields than I. But this is just my 2 cents on it all. So
to summarise, we need nuclear power, Shale is probably going to be a bubble, we
need to pay more attention to world oil consumption/supply decay and
politicians know next to nothing about the markets!
