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Cheap Oil is Gone Forever

It's Do or Die for the U.S. Shale Boom

Written by Keith Kohl
Posted June 10, 2014 at 7:09PM

Sixty years ago, a man stood in front of a crowd that had gathered at a small hotel in San Antonio.

Minutes before approaching the podium, however, he was quietly ushered off the stage to take an urgent phone call. On the other end of the line was a PR rep for one of the largest oil companies in the world, begging him not to give his speech.

Luckily, Dr. Marion King Hubbert wasn't persuaded. He went on to deliver what was arguably the most important oil prediction since Edwin Drake first drilled a hole into the Pennsylvanian soil in search of salt brine.

Essentially, Dr. Hubbert believed there would be a point in time when oil production in the U.S. would peak and begin to decline.

Even though his work became the basis for the peak oil theory, far too many people haven't realized that this isn't a theory — it's a fact.

Look, every oil field in history follows a similar life cycle. Nobody should be questioning whether or not production will eventually peak, just the timing.

I know what some of you might be thinking... "But we're in the middle of an oil boom! How can you say we're running out of oil?"

I can't tell you how many times I've heard that line in the past. Unfortunately, the concern has never been over how much oil is left underground. Trust me, dear reader, there will be oil in the ground long after we're dust in the wind.

In reality, peak oil is about the rate at which we can produce that oil.

And before you dismiss peak oil as hogwash altogether, just consider exactly how much slack we have to pick up from decades of declining production...

The Cost of Our Oil Boom

Don't get me wrong; I'm certainly not ready give up on the tight oil plays that contributed 3.22 million barrels per day to U.S. output at the end of 2013. If you haven't yet realized how important this oil is to our future supply, this picture is worth a thousand words:

eia tight oil 6-10

But let's take a second to look at why a resurgence in U.S. oil production is even more valuable than you can possibly imagine.

You see, there's another sobering fact we're all going to have to come to terms with very soon: cheap oil is gone forever.

We definitely can't lump new production in with the high quality crude of the past, either. Below, you'll see that the world's crude oil supply is of poorer quality.

chart quality 6-10

Click Image to Enlarge

Much of tomorrow's oil isn't of the light, sweet variety craved by refiners.

That's a stark contrast to the new oil supply coming on-line in the United States. Between 2011 and 2013, approximately 96% of the growth in oil production inside the U.S. — roughly 1.8 million barrels per day — has been a light, sweet grade with an API gravity of 40 degrees or higher and a sulfur content of 0.3% or less.

Perhaps even more disconcerting, however, is that the tomorrow's oil will come at a hefty price. Sadly, the days of drilling a vertical well into the ground and coming up with a gusher are long past.

Last week, I noted that the International Energy Agency recently concluded that the world needs to invest $40 trillion between now and 2035 to meet its projected growth in energy demand. An additional $8 trillion will have to be spent on energy efficiency.

Yet there's an even more ominous statistic buried in the IEA's report: the lion's share of that $40 trillion will be needed to offset declining production from existing oil and gas fields.

That's a considerable obstacle no matter how you look at it.

It's also placing a huge value on one specific group of oil drillers...

Bet on the Best

One of the major issues with developing tight oil plays like the Bakken play in North Dakota is the steep price tag that comes with these wells. Today, it's not so much how much oil you have, but whether you can economically extract that crude.

So where do you look first?

Well, the Energy Information Administration already tipped us off to the technology that's taking the shale revolution by storm:

chart octopus 6-10You see, there's a fundamental transition taking place in the way companies are developing our massive tight oil plays. And the technique pictured above is quickly becoming the single most important drilling strategy, delivering incredible value for individual investors like us.

I've said it before, and I'll say it again... the next stage in our tight oil and gas boom won't come from discovery — it'll come by way of technology.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.



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