NAI BIZ TALK - High Gas Price can be Advantageous to the US

Samson Li's picture

About the Author: Samson Li has ten years of investment experience. He acted as Chief Analyst at Centaline Wealth Management Ltd, a subsidiary of Centaline Group, managing a fund specializing in natural resources and commodities. With an in-depth knowledge of mining, energy and commodities as well as unique analysis of global economic trend, he is often interviewed by NOW TV, TVB, Metro Radio, Hong Kong Daily News, AM730, Economic Digest, China Gold News and various other media. Besides, he is a columnist for Capital CEO, Quam and Away from the Flock on Centaline Group's website.

The U.S. is the largest demand for oil in the world, with 24 barrels of oil consumption per capita per year, which is 10 times larger than China’s. The U.S. needs to import foreign oil year after year, and this is one of the reasons for its trading deficit. Fortunately for them, with the advance of technology improvements, the emergence of shale oil/tight oil increases local oil production in the U.S. , and thus reliance on foreign oil imports has been reducing. In 2006 the average local oil production per day in the U.S. was 8,317 k barrels, and they are producing an average of 11,147.7k barrels in the year of 2012, a growth of 33%.

One of the most beneficial areas is North Dakota’s Bakken Formation. Drilling activities started at Bakken as early as 1951, and in 1999, USGS estimated there was a total of 413 billion barrels of oil in place under Bakken. However with the technology that time, oil recovery was not economic at Bakken. With 20 years of trial and error, along with the improvement in skills and technology, oil resources under Bakken were finally unlocked. The production at the Bakken has greatly enhanced total oil production in North Dakota, with 39,943 k barrels of oil produced in 2006, surging by more than 5 times to 24,286 in 2012.

Another hot spot for shale oil is the Eagle Ford Formation at Southern Texas. Due to the fact that the Eagle Ford Formation is more brittle, and resources exist are closer to the surface compared to Bakken’s, operating costs are relatively lower. Experts believe there are a total of 3 billion barrels of oil recoverable at Eagle Ford, and the daily average production there for the first 6 months this year is already 51% more than the daily average in 2012.

Other areas like the Permian Basin and the Illinois Basin have become the recent popular story for shale oil discovery/production in the investment community.

One of the most benefited groups under the development of U.S.’s local shale oil industry of course is the energy companies. For example, Continental Resources, a company developing shale at Bakken, has seen its share price risen from US$20-ish to the most recent over US$110 per share in the last five years; Petrohawk, an energy company focused on the Eagle Ford shale, also saw its share price rose from a few bucks to US$37/share, when being taken out by BHP in 2011. However energy companies aside, these shale development activities have actually spurred the local economy as well, with better employments, spendings, housing prices etc.. Of course if oil price cannot sustain at its current level, it would not be much use to the U.S. even they are sitting on huge reserves waiting to be untapped. However one has to admit the shale revolution has indeed softened the blow to the U.S. after the Global Financial Crisis.

Experts are more and more optimistic about U.S. oil production in the long run, with some forecasting they could surpass the Saudi Arabia to become the largest oil & gas producing country in the world, and some even predicting U.S. to be a net exporter of oil & gas down the road. Will this become a fact, or is it just based on imaginations of the people? We shall see.