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!