Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Potential Highs and Lows For Gold In 2020 - 5th Jun 20
Tying Gold Miners and USD Signals for What Comes Next - 5th Jun 20
Rigged Markets - Central Bank Hypnosis - 5th Jun 20
Gold’s role in the Greater Depression of 2020 - 5th Jun 20
UK Coronavirus Catastrophe Trend Analysis Video - 5th Jun 20
Why Land Rover Discovery Sport SAT NAV is Crap, Use Google Maps Instead - 5th Jun 20
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Is the U.S. Shale Oil Boom Out of Balance?

Commodities / Crude Oil Aug 08, 2013 - 11:11 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: It's boom time in Texas. From the Eagle Ford shale to the Permian Basin, it's practically raining money.

Now you would think that would be a positive for the local economies. But as this boom unfolds, it is not without its own share of problems.


In its wake, the production largess in Texas has led to fast-rising electricity costs. This counterforce is wreaking havoc on localities across the region, especially small businesses.

In fact, a number of local non-oil end users have already reported a 20%-25% increase in electricity costs, with more expected to follow.

It is the other side of the latest Texas oil boom and it's an example of how energy costs can actually go higher as the volume of crude surges.

That's because drilling for oil is a very power-intensive undertaking, as are the associated services of maintaining pressure, operating separation and running the related initial field processing equipment. Not to mention the ancillary usages of electricity ranging from field office lighting to dust control.

As a result, the region encompassing El Paso in Texas and Las Cruces in New Mexico now has an expanding power deficit.

It is one of several examples how the resurgence of one energy source can result in adverse pressures on another...

Trouble on the Grid
In what is developing into a drilling frenzy - caused by a combination of rising crude prices and a greater reliance on domestic production to meet U.S. market demand - the increased power demanded has outstripped the ability of the regional grid.

As the demand for the power increases, so also does the price of that electricity.

And whenever this type of industrial demand ramps up, the greater bulk users tend to benefit the most. Even though overall electricity prices are increasing, the prorated portion earmarked for the largest user results in a net advantage in actual unit costs.

On the other hand, smaller (almost always local) businesses will realize a higher spike.

Now sometimes this will even out moving forward, as the profitability in the regional economy "trickles down" elevated sales and revenues to other sectors.

However, that is often not the case with oil and natural gas production, at least in the near and medium term.

That is because, while there will be some residual advantage to local service and material providers when the enhanced drilling programs are introduced, most of the profits move elsewhere.

And Texas is not alone...

What is going on with electricity in parts of the Southwest has been paralleled in other parts of the country.

The advent of rapidly advancing drilling expenditures has resulted in significant infrastructure and social services erosions, labor and material disruptions, combined with big increases in local inflation.

Already, parts of the Bakken and Williston basins in North Dakota and the Marcellus in Pennsylvania have provided examples of these types of dislocations. These have followed similar and earlier indicators from the Barnett between Fort Worth and Denton farther north in Texas.

I happen to have experience in all of these basins. And I can promise you that the distortions to the local economies remain well after the drilling has moved elsewhere.

U.S. Oil Boom: The Pain of 450% Inflation

Much of this is manifested in sector and regional inflation. With the arrival of large outlays at oil and gas plays, prices for all manner of commodities are raised, hitting local residents head-on.

In fact, I have encountered a number of examples of this over the past decade.

One happened in a small town in the Bakken where apartment rentals increased on average more than 450% in three months.

And there was an earlier experience I had in the small hamlet of Cresson, southwest of Fort Worth. The menu prices at the local diner had changed so often (always up), they were merely scratched out in pencil.

Another was provided to me by a colorful township committeeman in western Pennsylvania. "If I see another pickup truck with an Oklahoma license plate," he told me one morning, "I'm going to shoot somebody."

It seemed to me a rather distinct way of putting the local disappointment with the lack of well-paying drilling jobs.

But the same fellow noted another problem...

He recounted to me a (rather long) story about recent repairs to the pipes in his house that cost three times more than the last time he had them fixed. Why? "Because all the elbow joints are needed first up at the well sites," he finally told me.

Without exception, the worst situation as the drilling rigs pull into town is to be a resident on a fixed income!

These distortions are inevitable when massive investment changes take place in small communities. They also oblige that state and national officials provide adequate "impact fees" to those affected.

Robbing Peter to Pay Paul
But what is currently underway in places like El Paso and Las Cruces is different.

Here, they are experiencing a genuine rift in the system providing available energy, a rift itself resulting from the production of another energy source. Events such as these require we consider something else.

As I have addressed several times before in these pages,the energy balance is under strain in Texas and elsewhere.

That's why we need to stop regarding energies by their labels (oil, gas, electricity, coal; conventional, unconventional, alternative, renewable) as distinct sources.

Rather, the real objective must be to develop a genuine energy balance encompassing as many sources as possible, providing both interchangeability and integration. In this case, regarding the next energy breakthrough as the silver bullet to replace oil misses the real objective.

That objective has to be a widening network of sources in an interconnected network.

Otherwise, as in parts southern Texas and New Mexico today, we will just be robbing some of Peter's energy to provide for Paul's.

To learn more about oil opportunities and subscribe to Dr. Kent Moors' free newsletter, Oil & Energy Investor, click here...

Source :http://moneymorning.com/2013/08/08/is-the-u-s-oil-boom-out-of-balance/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules