It's easy for articles about the shale boom to get lost in the
After being flooded with articles (each more optimistic than the
last), it's no wonder some investors have started to become
desensitized to any oil-related news. After all, we've already
learned that the U.S. is on track to become the world's top oil
producer -- you can't have a much larger revelation than that.
Not to mention that you've likely seen alot of superfluous
adjectives used to describe the state of North America's shale
production: booming, gushing, staggering, etc.
But a report issued last week from the International Energy
Agency (IEA) just might be the biggest eye-opener yet.
According to the IEA, aggressive development of reservoirs like
the Bakken Shale and Eagle Ford Shale has unleashed awave of new
supplies that is "sending ripples throughout the world." And the
far-reaching implications could be unlike anything we've seen.
In the eyes of the IEA, surging output from shale formations
could be the biggest game-changer in the global energymarket
since the rise of China as an economic superpower.
When the IEA talks, the market listens. And the Paris-based
organization isn't just talking -- it's yelling.
How else would you interpret an opening statement like this:
"The supply shock created by a surge in North American oil
productionwill be as transformative to the market over the next
five years as was the rise of Chinese demand over the last 15."
Without context, that statement could be lost on some people, so
here's the story:
Fueled by powerful double-digit economic expansion, China has
emerged as the world's largest energy user.
As you can see from the chart below, China's oil consumption has
surged to 10 million barrels per day, far outpacing domestic
production. The widening gap between the two is being filled by
rapidly growing imports. In other words, approximately 6 million
barrels of oil a day are being pulled out of the global supply
stream and diverted strictly to feed China's appetite.
Needless to say, China's demand has dramatically reshaped the
global energy picture. Now, if the IEA is right, U.S. shale
production could trigger a similar overhaul from the supply side.
The latest forecast has global oil consumption climbing from 90.6
million barrels per day now to 96.7 million per day by 2018. That
means we'll need to dig up an additional 6 million barrels per
day to accommodate rising demand.
The Organization of Petroleum Exporting Countries (OPEC) is
equipped to handle that challenge. OPEC members hold about 6.4
million barrels per day of spare production capacity that can be
turned on if necessary. But thecartel 's influence might be
waning, since non-OPEC daily oil production is expected to be 6
million barrels higher in 2018 than it is now.
In other words,
we don't need any incremental oil production from OPEC.
Fully two-thirds of the projected increase (
about 3.9 million barrels per day
) will come from the United States. Non-conventional basins like
the Eagle Ford in South Texas and the Bakken in North Dakota
won't muscle OPEC out of the market, but they will make it
difficult for the organization to boost production without
As we know, none of this would have been possible without
fracking and horizontal drilling.
The IEA characterized fracking technology as a "bonanza" that
will unlock other sources and lead to a broad reassessment of
global oil reserves. Funny they should choose that word,
considering that's exactly how I referred to the situation in my
Scarcity & RealWealth
issue back in April 2011.
So what does thismean for investors?
First, I shouldnote that there will be winners as well as losers
from this development. With new supplies flooding the market, I
doubtbenchmark crude oil prices will revisit former highs near
$150 per barrel anytime soon.
But I don't invest in producers like
Occidental Petroleum (
because of an expected increase in oil prices anymore than
stockholders are hoping for skyrocketing Big Mac prices.
Well-positioned producers like Occidental (which has a large
position in California's prolific Monterey Shale) have aggressive
growth plans in place and can be quite prosperous even in a flat
But the real winners from this global shake-up are the
companies that handle the day-to-day business of drilling,
transporting and storing the millions of additional barrels that
will soon be coming to the surface.
And that's exactly where we'll be focusing our attention in the
coming months. Stay tuned...