What goes up must come down.
Without fail, this is always how it pans out.
As one of the first on the scene to profit from the solar boom back in 2006, 2007, and 2008, I was also one of the first to flee the scene after the recession hit and ripped the sails off the solar ship that launched stocks like SunPower (NASDAQ: SPWR) and First Solar (NASDAQ: FSLR) to the moon.
The years before the crash were some real boom times. Triple-digit gains were the norm, and watching naysayers squirm was an absolute delight.
We saw the same with fracking over the past few years.
There’s no doubt that our resident oil and gas expert Keith Kohl helped turn ordinary investors into big-time players by hitting the fracking boom early — and often. And even with the price of oil crashing, Keith’s still been able to keep the boat steady.
But what’s in store next for the fracking machine?
At what price does fracking hit a wall?
A few months ago, we saw severe disruption at $60. Then it went to $40. Now we hear $30.
Of course, pricing isn’t the only issue.
Distrust and Skepticism
While the fracking revolution has enabled the U.S. to regain its footing as a leading global oil producer, it’s also left a trail of distrust and skepticism that hasn’t gone unnoticed.
There’s the issue of decline rates, for instance.
A couple of years ago, Bloomberg analyst Asjylyn Loder commented on this, writing:
Chesapeake Energy’s Serenity 1-3H well near Oklahoma City came in as a gusher in 2009, pumping more than 1,200 barrels of oil a day and kicking off a rush to drill that extended into Kansas. Now the well produces less than 100 barrels a day, state records show. Serenity’s swift decline sheds light on a dirty secret of the oil boom: It may not last. Shale wells start strong and fade fast, and producers are drilling at a breakneck pace to hold output steady. In the fields, this incessant need to drill is known as the Red Queen, after the character in Through the Looking-Glass who tells Alice, “It takes all the running you can do, to keep in the same place.”
In North Dakota’s Bakken Shale, a well formally known as Robert Heuer 1-17R put out 2,358 barrels in May 2004, when it went live. The output proved there was money to be made drilling in the Bakken and kicked off an oil rush in North Dakota. Continental Resources, the well’s operator, built a monument to it. Production declined 69 percent in the first year.
According to geoscientist David Hughes, the U.S. must drill 6,000 new wells per year at a cost of $35 billion to maintain current production. He also notes that the newest wells aren’t as productive as previous well drilled in the same locations during the first few years of the shale boom.
Hughes believes production will peak in 2017 and fall back down to 2012 levels two years later.
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Fracking Isn’t Going Anywhere!
There are also the environmental concerns.
While plenty of pro-fracking types will tell you fracking is completely safe, there are certainly a lot of individuals, scientists, and researchers that will disagree — with data in hand.
Truth is, just like any production of fossil fuels, fracking carries with it its own environmental burdens. And while plenty of anti-fracking folks will point to these burdens as justification for ending the fracking boom, fracking isn’t going anywhere. Without it, we go back to being overly reliant on foreign oil — and that’s just not going to happen again.
Yes, crashing oil prices, the threat of rapid and steep decline rates, and the continued environmental battles will weigh on the industry for the foreseeable future. But there’s one undeniable truth about fracking…
As long as the global demand for oil remains strong, and as long as oil remains the lifeblood of the global economy, the U.S. will never put the kibosh on the technology that now serves as a necessary hedge against the actions of OPEC.
The Saudis and the U.S. continue their game of chicken, but right now, it’s Russia and Venezuela that are most vulnerable. The Saudis will hold tight as long as they can, but they won’t destroy their entire kingdom out of spite. At some point, they’ll break. And when they do, the last thing you want to be doing is dumping domestic oil stocks.
Yes, for oil and gas investors, it’s been a tough few months. And it may get worse in the short term. But don’t get too comfortable with this brief respite in high oil prices.
Oil’s going to come back soon. And when it does, you don’t want to be sitting on the sidelines.
To a new way of life and a new generation of wealth…
Jeff Siegel
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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.
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