Is oil getting attractive?

[doodle]

Oil has gotten hammered from the highs about a month ago. At what level does it start to look attractive here? Marginal Cost of Production???

I remember when it went under 40 dollars during 2008 and I just bought it hand over fist thinking that there was no way that the lifeblood of the world economy could stay that low forever. At a certain point oil becomes a winning proposition. You can't lose with it if you are willing to hold on until the next price spike.

[MediumTex]

The longer term play, IMHO, is betting that the price per BTU spread between oil and natural gas will close.  That means natural gas will get more expensive, oil will get cheaper, or some combination of the two.

Low cost natural gas producers with large reserves may see nice profits in coming years.

[doodle]

MT lately there seems to be a growing opposition to fracking natural gas in the states. I know I wouldn't feel comfortable with that going on near my well water.

The other large problem with Nat. Gas seems to be the amount of water that is necessary for fracking which put the natural gas industry in conflict with the agricultural industry. Water out west is a precious commodity.

As far as transportation goes oil seems to be with us for a while longer.

[AdamA]

MT lately there seems to be a growing opposition to fracking natural gas in the states.

I'm pretty sure we already have a pretty big reserve.

[MediumTex]

MT lately there seems to be a growing opposition to fracking natural gas in the states. I know I wouldn't feel comfortable with that going on near my well water.

The other large problem with Nat. Gas seems to be the amount of water that is necessary for fracking which put the natural gas industry in conflict with the agricultural industry. Water out west is a precious commodity.

As far as transportation goes oil seems to be with us for a while longer.

I'm not talking about fracking.

I'm talking mainly about the ultradeep gas play on the gulf shelf, which is pretty exciting.

Wherever the natural gas is coming from, though, I see the cost per BTU spread between oil and gas closing just for pure economic reasons (i.e., presumably people will naturally migrate over time to a lower cost fuel).

[Storm]

MT, I think that's a wise call on the price of natural gas rising compared to oil.  The fracking process has opened up a lot of new reserves and created a surplus of supply.  However, right now there is a huge push legislatively to clean up the process.  They are using all kinds of really nasty chemicals to do the fracking, which might be cheap, but the environmental externalities are not being paid for by the companies doing this.

For example, right now they are using chemicals like benzene to do some of the processing, but there is a safer, more clean way to do it that requires them to use electricity instead of chemicals.  Of course the energy companies don't want to do this because it costs a lot of money to run electricity all the way to remote fracking stations, as well as the costs of buying electricity.

In any case, it is pretty much a sure bet that the cost of extracting natural gas through fracking is going to increase as environmental laws and regulations are passed, so that will drive the price of natural gas up in the market.

[HB Reader]

For example, right now they are using chemicals like benzene to do some of the processing, but there is a safer, more clean way to do it that requires them to use electricity instead of chemicals.  Of course the energy companies don't want to do this because it costs a lot of money to run electricity all the way to remote fracking stations, as well as the costs of buying electricity.

Storm -- I have been looking at issues relating to fracking over the last year but I haven't run into the idea of the use of electricity.  Do you remember where you came across this information?

We are expecting some fracking to be done on our family farm in Oklahoma over the next year.  Based on the research I've done, it seems the ground water contamination problem arises primarily from how they dispose of the drilling water and chemicals.  In Pennsylvania, where much of the controversy originally arose, it was simply dumped in many cases into water treatment facilities that were clearly inadequate and it was then released into rivers or streams.  In Oklahoma and Texas, as I understand it, the drilling water and chemical backwash -- which is trucked in and out -- is partially recycled and eventually disposed of by pumping it back down into older empty wells (where the gas shale used to be) under thousands of feet of impermeable rock.  Apparently the geology in Pennsylvania does not permit this to be done effectively.

At any rate, we came to the conclusion that as long as the cement well casings are properly constructed to prevent leakage, fracking was probably as safe as the conventional "straight" drilling for natural gas that has been conducted in western Oklahoma for the last 40 years.  The actual hydro-fracking occurs at about 7,000 to 9,000 feet.  The ground water wells are usually less than a 1,000 feet deep.   

[Storm]

Here is the story I heard on NPR - about air quality concerns.  The ground water quality concerns are well known, but perhaps the air quality concerns are newer:

http://www.npr.org/2011/06/21/137197991 ... -gas-image

Utility lawyer John Hanger is also a booster for natural gas. He used to head Pennsylvania's Department of Environmental Protection. But he warns that the industry could hurt itself if it fails to control air pollution.

Hanger predicts that big cities downwind from Marcellus that already struggle with air quality will sue the gas companies if they don't control their pollution.

"The industry won't be able to grow in the way it needs to grow unless it uses the cleanest technologies," he says. "It will run into a legal brick wall."

Hanger says local, state and federal governments must require the cleanest practices. For instance those compressor stations near the Judys' could run on electricity.

A crackdown could be on the way. The federal Environmental Protection Agency plans to propose new rules designed to cut pollution from natural gas operations this summer.

[HB Reader]

Here is the story I heard on NPR - about air quality concerns.  The ground water quality concerns are well known, but perhaps the air quality concerns are newer:

http://www.npr.org/2011/06/21/137197991 ... -gas-image

Thanks.  The article is probably right -- natural gas is cleaner than coal, but it definitely has it's own pollution issues. 

It's pretty amazing to see gas wells being drilled in the middle of urban areas.  I saw several being drilled in Ft Worth last year.  Home owners throughout the city are receiving royalty checks simply by virtue of having purchased regular suburban homes that happen to be located on top of the Barnett Shale formation. 

[Storm]

Here is the story I heard on NPR - about air quality concerns.  The ground water quality concerns are well known, but perhaps the air quality concerns are newer:

http://www.npr.org/2011/06/21/137197991 ... -gas-image

Thanks.  The article is probably right -- natural gas is cleaner than coal, but it definitely has it's own pollution issues. 

It's pretty amazing to see gas wells being drilled in the middle of urban areas.  I saw several being drilled in Ft Worth last year.   Home owners throughout the city are receiving royalty checks simply by virtue of having purchased regular suburban homes that happen to be located on top of the Barnett Shale formation.   

Natural Gas is definitely cleaner than coal, but the thing about any industry is that it will extract the resources in the cheapest way possible.  If the cheapest way possible involves toxic chemicals and dumping it directly into the groundwater table, that's what they'll do until the government comes along and passes regulations against it.

I'm not sure I'd want them to be fracking in my back yard no matter how big the royalty check.  The problem is that it only takes 1 person in a neighborhood to give them rights and they can go sideways underneath your property.  If the gas is worth enough, they could feel free to buy out my house for... <Dr. Evil voice> 1 MILLION DOLLARS </Dr. Evil voice>

[HB Reader]

I'm not sure I'd want them to be fracking in my back yard no matter how big the royalty check.  The problem is that it only takes 1 person in a neighborhood to give them rights and they can go sideways underneath your property.  If the gas is worth enough, they could feel free to buy out my house for... <Dr. Evil voice> 1 MILLION DOLLARS </Dr. Evil voice>

In Oklahoma -- I'm not sure about Texas -- everyone in the section (640 acres) where the well was drilled shares in the royalties (assuming they haven't sold their mineral rights separately).  Some may have higher or lower royalty percentages, but you don't usually end up with much of that "1 person in the neighborhood" problem.  However, I have often wondered about the similar problem of the rights of owners in adjacent sections if the well is drilled close to the section line.      

[doodle]

Americans want cheap energy but nobody wants to risk the environmental hazards that this includes. Floridians want cheap gas but don't want to risk contaminating our beaches by drilling in the gulf. We cant have it both ways!

I recognize that a base load of our energy needs must come from fossil fuels but a huge amount of our energy needs could be taken care of by conservation, increased efficiency, and alternative "clean" energy. For the life of me I cannot understand why Americans are so slow to accept this? Do we think that "clean" energy makes us pansies? That it is effeminate?

All of the talk in this country focuses on more, more, more. We should be focusing on innovation that allows us to use "less, less, less"

Rant off.

[doodle]

And the plot surrounding natural gas thickens
http://www.nytimes.com/2011/06/26/us/26 ... =1&_r=1&hp

[Storm]

Interesting article, doodle.  So, if the natural gas companies are overstating the productivity of their wells, and I think we are all in agreement that clean fracking processes will cost them more money to extract the same amount of gas, do you think a good play would be on natural gas futures?  Betting that the cost will rise as supply is not what they promised and extraction is more expensive?

I would hesitate to invest directly in the companies themselves, but gas does seem to be a good way forward when oil becomes scarce.  I would think we could retool our fueling stations to have natural gas electric generators and fast charge electric cars within about 5-10 years.  If the reserves are as large as I've heard they are, natural gas could power our vehicles for the next 100 years at least.  You still have the greenhouse gas problem to deal with, but the particulate pollution is not nearly as bad.

[doodle]

I have a lot of great ideas about what I "think" is going to happen in the future but I have no idea whether they will come true or not. BP taught me a good lesson that hopefully I will remember for a while.    

I bought BP when their stock price dropped about 30 percent after the spill in the Gulf. Although the spill was serious, I was confident that the company would rebound quickly or at least within a year or two. Well, as more and more bad news came out and the price continued to drop I began to wonder if this disaster could spell the end of the company.

I finally bailed after losing about 30 percent on the stock. Of course a few weeks later they capped the well and the stock price doubled from the lows....just about where I sold at.

I had a feeling that it would come back but I didn't have the guts to hold on as the news got progressively worse and worse. Since that loss I have sworn off any more variable portfolio type speculation. I don't have the guts for it.

Nat Gas or oil could be a boon or a bust. I just sleep a lot better at night when my money isn't riding on one outcome or the other.

However, if oil hits 35 dollars a barrel again I think I might just have to reevaluate those promises to myself.  :)

[MediumTex]

I had a feeling that it would come back but I didn't have the guts to hold on as the news got progressively worse and worse. Since that loss I have sworn off any more variable portfolio type speculation. I don't have the guts for it.

Fear erodes rationality.

Greed erodes rationality, too, but fear seems to do it more efficiently.