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Oil Vs. Natural Gas

Keith Kohl

Written By Keith Kohl

Posted November 30, 2009

The first headline that crossed my desk yesterday was a recent prediction made by Warren Buffett.

It wasn’t the prediction itself that made me skeptical, but rather the steps needed to make it come true.

While speaking at Rice University, one student asked Buffett for his thoughts on peak oil — a subject with which my readers are very familiar. Specifically, the question was what would replace carbon fuel. He predicted that all cars would be electric within the next 20 years.

I believe Warren missed the mark.

Don’t get me wrong, dear reader, the idea is sound: twenty years might be enough to make that conversion. However, you’re not going to wake up one morning and see nothing but electric cars on the road.

We simply don’t have that long to wait.

I know the optimists are quick to point out that U.S. oil production is about to make its largest jump since production peaked in 1970. In fact, if U.S. production holds steady at 5.26 million barrels per day during December, then year-over-year production growth would be 6.4% — that’s compared to the 4.95 million barrels per day averaged production in 2008.

Not surprisingly, this growth is attributed to the developing Bakken oil play in North Dakota and Montana, as well as production in from the Gulf of Mexico.

But let’s be honest with ourselves… last year, we weren’t exactly in a good spot.

Oil prices had plummeted during the last five months. Demand fell off a cliff. Furthermore, the world’s biggest producers like OPEC couldn’t do a thing.

Of course we should expect to see production grow after witnessing a year like that — especially considering oil prices have doubled since the beginning of the 2009.

However, no matter how you slice the optimism, the sobering truth is that the U.S. is sliding down the backside of peak oil. Sadly, there’s no recovering from that.

And I still think Buffett missed the mark.

Here’s why…

A Glut of Fuel at Our Fingertips

Bridging the energy gap between oil and renewables isn’t going to happen anytime soon. People caught up in the hype tend to overlook the fact that fossil fuels make up approximately 84% of U.S. energy consumption.

I think the first move away from an oil-dominated transportation sector will be to natural gas.

It makes sense to utilize a domestically abundant resource like natural gas.

As you’re probably aware, there is a glut in natural gas right now. Last week, the EIA reported another build in natural gas storage. Working gas storage grew to 3,835 Bcf. If you’re keeping track, current inventory levels are 13% above the 5-year average, and approximately 11% higher than a year ago.

US Working Gas Storage

I don’t expect the U.S. to reach its storage capacity, but it’s a little too close for comfort.

Coupling the supply glut with weak demand, it’s no wonder that prices have fallen more than 70% since summer 2008.

The problem, however, is that things aren’t getting much better. At least, not in the near future…

According to the EIA, natural gas consumption is expected to drop 1.9% this year, and then drop another 1.1% in 2010:

U.S. Natural Gas Consumption

In his natural gas price forecast earlier this year, my colleague Chris Nelder hit the nail on the head:

"As I have often suggested, the combined virtues of lower emissions, an inexpensive and large domestic supply, and its suitability as a bridge fuel to wean us away from oil will prove irresistible to policymakers, particularly as we begin to feel the effects of peak oil."

Profiting from the Natural Gas Glut

Naturally, investors aren’t left in the dark. Far from it, actually.

Last week, Baker Hughes reported that the number of rigs drilling for oil and gas in the U.S. climbed to 1,137. Make no mistake: U.S. domestic oil production may increase this year, but 65% of those rigs are actively drilling for natural gas.

Despite the oversupply, companies are still rushing to develop shale plays across the U.S.

Although natural gas prices are stuck in limbo between $4 and $5 per Mcf, there’s a small group of producers that have been on a roll lately. In our free report, you can catch up on the four players at the forefront of this shale boom.

Will the Oracle Regret His Call?

I’ll let you make your own call on whether or not his prediction will come to fruition. But as I mentioned earlier, 20 years is a long time to wait.

Personally, I think natural gas simply has too much going for it to ignore.

And I don’t think I’m alone in saying it’s likely that natural gas will be the bridge from oil to renewables. At the very least, it will buy us the time we need to bring a renewable solution to scale.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

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