Shale Oil Not The Answer

This morning on CNBC, the Chief Executive Officer of Continental Resources (CLR), Harold Hamm, gave an overview of what he considers to be the answer to America's energy deficit:  Oil Shale.

Mr. Hamm was billed as the richest oil man in America, so he ought to know what he's talking about, don't ya think?  I think someone needs to send him the "Marko's Take" pieces on "Peak Oil", which discuss in detail exactly why oil shale is NOT the answer and NOT even close.

CLR is a major operator in what is known as the Williston Basin, a large fossil fuel deposit stretching from Canada into North Dakota and Montana.  Increased oil production is driving a healthy state economy, one of the only healthy states in the Union.

The Bakken Oil Shale Formation is believed to contain a whopping 3.65 billion recoverable barrels of oil.  Not bad, but hardly the answer.  Even if it could be accessed immediately at NO cost, it would last for 40 days of world oil consumption.  Yes, 40 days.

However, shale oil is notoriously expensive to access.  It is energy intensive, meaning that it requires substantial energy just to produce the energy.  So for every barrel accessed, it requires more than half a barrel in energy.  Thus, the 40 day supply shrinks to 20 days or less.

In addition, shale oil requires great quantities of water.  And, it is accessed through very environmentally unfriendly strip mining.  Have you every seen a shale oil project?  It would make the Sierra Club get out cannons, normally reserved for Japanese whaling boats, and launch them at the oil men.

Shale oil, on the other hand, is quite light, meaning that it has abundant quantities of the more valuable oil products such as jet fuel and gasoline.  On the other, other hand, it is full of various minerals and metals, which are very expensive and energy consuming to refine.  Our refinery system would need to be dramatically upgraded if shale oil ever became a great source of energy.  Don't worry.  It won't!

The large U.S. Oil Companies have passed on shale projects for the most part.  I know, they want to keep oil out of our hands so they can enslave us.  But, aren't they interested in making money?  Don't you think that if there was money to be made, they'd be there in force?  Yet, none of them show anything but a casual and passing interest. 

The majors prefer to pursue the "cheap" offshore oil in the Gulf of Mexico which must be accessed by drilling many miles down into the Continental Shelf.  And, incurring the wrath of environmental groups.  And, incurring the wrath of Congress.  And, the public.  Seriously, if shale were so promising, why would they pursue deep drilling, with all its expense and risk, when a cheap domestic source were available?

There are a plethora of articles which suggest that the U.S. and World are literally swimming in oil.  That is just not so.  Fossil fuels are being depleted are very rapid rates, and every major oil producer, with the exception of Russia and Brazil have entered their own "Peak Oil" situation, and production is now falling off a cliff.  That includes the United States, Venezuela, Mexico, the North Sea and most of the Middle East.  Only Iran and Iraq have healthy reserves.  Wonder why we decided to invade Iraq?  Wonder why we are so against Iran's nuclear capabilties?  I would think it's obvious.

In fact, our presence in Afghanistan is not only about Opium, but about natural resources.  Don't think for a second that we haven't mapped all the resources in that country.  If it had nothing, trust me, our troops would have left long ago.

For investors, opportunities in oil are fraught with multiple risks.  Most importantly, is the likelihood of a "Windfall Profits Tax", which was a failure in the 1970's and would be just as big a failure if enacted today.
However, the major oil companies have very fat dividends and are among the only safe plays in the stock market today.

Don't yourself be fooled by the un-justifiable hype in Shale Oil.

Marko's Take

Oil Prices Threaten Recovery

While reported economic data suggests an ongoing recovery, there continues to be a rash of underlying problems which threaten to make any upturn short-lived.  We've discussed the deteriorating situation in the Euro-Zone, especially Greece.  Recently, another "bomb" has had its fuse lit - the sudden runup in oil prices.

Crude oil prices shot up to nearly $150 per barrel in mid-2008 before the financial crunch and deflation wave led to a several month crash to about $30.  At the time, the world economy ground to a halt while financial intermediaries like Lehman, Bear Stearns, AIG, Fannie Mae and a slew of banks all found themselves insolvent in the blink of an eye.

Since bottoming, crude oil has ground steadily higher and appears ready to accelerate to the upside.  This week, oil climbed to $87 a barrel, its highest level since October 2008 and prompted concerns that triple-digit crude was once again a propect in the not-so-distant future.

The latest surge seems to have been prompted by rising confidence in a global economic recovery, even if most traders and bankers are still cautious about supply and demand fundamentals.

Pricier oil and other key commodities, notably iron ore and copper, could ripple through the economy and financial markets, potentially triggering inflation and forcing central banks to lift interest rates from ultra-low levels.  This could force bond yields higher, but lower the attractions of equities.

A HUGE difference from last year is that then the oil price was rising against the backdrop of a weaker dollar. This year crude and the dollar have risen together. In other words, had the dollar been weakening, the price of crude would be MUCH higher.

Prices are as much an effect of the economic expansion as a threat to it.  China, the fastest-growing economy, is expected to consume 520,000 barrels per day more this year than last. China's growth in demand alone will make up 1/3 of the worldwide growth in crude demand.

Higher crude prices are starting to be felt at the pump.  Only a couple of months ago, gasoline prices were under $3.00 per gallon, but in many places are now within reach of $4.00 and may shoot higher as the summer driving season gets underway.

In Great Britain, gasoline prices are now £6 gallon.  This has lead to a significant falloff in demand and is an element in the declining pound and sluggish U.K. economy.

Adding further to fears are the recent escalation of tensions over the Iran situation, as more countries are prepared to impose sanctions.  A huge unknown would how Tehran might react to sanctions and the prospect of a military reaction given the growing suspicions that the country is now a nuclear threat.

Furthermore, recently, Iraq has shown signs of destabilizing and plans to develop Baghdad's huge oil fields might be in jeopardy.

Clearly, any Middle Eastern military confrontation would immediately send crude oil prices well into the triple-digit range and have worldwide economic ramifications.

In the age of "Peak Oil", any disruption of supplies will have grave effects on the tenuous global financial structure.

Marko's Take

Our lastest video on the legality of the Personal Income Tax is now posted at  (http://www.youtube.com/user/MarkosTakeTV#p/u/0/1TInKnCIikg)