Newt Gingrich is playing you for a fool.
According to Gingrich, if we drill and produce more oil at home… we’ll pay less at the gas pump. He’s wrong.
I’m excited about our domestic oil production. And I do believe it will grow – dramatically. But if you believe a politician when he says more production at home will lower oil prices… you’re buying a line.
Energy consumers are going to continue to pay high prices. But energy investors are better off. Here’s why…[ad#Google Adsense 336×280-IA]As Gingrich correctly points out, the shale oil revolution has allowed U.S. oil production to rise for the first time in over 18 years.
He’s also correct that the estimate for recoverable oil from the Bakken shale in North Dakota rose 2,500% since the first estimate in 1995.
In 2003, Bakken shale oil production made up just 1% of U.S. oil production.
By 2010, oil from the Bakken made up 6% of U.S. oil producton.
That’s huge… and it foreshadows even more gains. But it won’t be enough to make a difference in the price of oil.
According to analysts at Hart Energy, an oil industry observer, oil production from the Eagle Ford shale and the Permian Basin formation in Texas will be nearly as important as the Bakken.
The study showed that unconventional oil from those three shales could add 730 million barrels of oil per year in seven years… a 37% increase over 2010.
Gingrich says the oil price is a supply-and-demand problem. According to his logic, the more oil we produce here at home, the lower the price should be. Sound logical. That’s what happened to natural gas, right?
Over the last 10 years, we’ve increased U.S. natural gas production by 39%… nearly all from shale gas production. And the price of natural gas has crashed. From 2003 to 2008, natural gas averaged $6.40 per thousand cubic feet (mcf). The massive supply has driven prices down to $2.40 per mcf today. That’s a 62% fall.
But natural gas is what we call a “stranded market.” It’s hard to ship the stuff without pipelines. We simply don’t have the right infrastructure (though we’re working on it). So getting natural gas out of North America is tough. Since we can’t get it out, we’re stuck with extra supply… and prices are low.
However, we can ship oil. It’s much easier to do. That’s why the oil price is set globally. Oil tankers can circle the globe to take product wherever the best prices are. That means extra production here at home isn’t going to reduce the global oil price.
And besides, we’re not likely to need to export any of that new oil.
We consume about 5.3 billion barrels of oil per year. Our total production in 2019 will be around 2.7 billion barrels, leaving a 2.6 billion-barrel deficit. Regardless of the campaign promises, we’re still going to be importing oil.
It is crucial for the U.S. to continue to explore and exploit domestic oil supplies. It is vitally important to connect Canadian crude to U.S. refining infrastructure, too. But none of that will substantially reduce the cost of oil… or, for that matter, the cost of a gallon of gas.
The lesson for energy consumers is that you can’t count on a politician to sway the global oil market. For energy investors, the picture is a little brighter…
As long as oil prices stay elevated, companies participating in the oil shale boom could make a fortune. Continental Resources (CLR), Encana (ECA), and Marathon Oil (MRO) all have major positions in oily shales in the U.S.
They should benefit from rising oil production in the long term… and so could their shareholders.
Matt Badiali[ad#jack p.s.]
Source: The Growth Stock Wire