Cash in on the Second Great American Oil Rush: with Shale

On 10 January 1901, the first oil ‘gusher’ erupted from a well in Beaumont, Texas. It spewed 80,000 barrels of oil in a day, at a time when 50 barrels was considered a lot.

The production of this one well was greater than the rest of the US put together. It proved beyond doubt that there were huge amounts of oil in the region.

Even though production at Beaumont quickly fell back to 10,000 barrels a day, the oil boom continued.

People flocked to Texas, attracted by the prospect of ‘striking it rich’. Towns in oil drilling areas sprung up overnight, and property values soared. Ever since then, Texas has maintained its position as America’s top oil producer.

But now Texas’ pole position is under threat.

Another great American oil rush is underway. And just like last time, there’s plenty of profit to be made for investors who know where to put their money…

Texas is in Danger of Losing its Oil Crown

Thanks to the shale gas and oil boom, Texas’ status as America’s top oil producer is under threat. In the past two years, North Dakota has moved into second place, overtaking Alaska, and the new oil rush is transforming its economy.

The boom is centred on the Bakken formation. Bakken is a rock formation covering 200,000 square miles (that’s twice the size of the UK) in North Dakota, Montana and Canada.

Oil was first discovered in the rocks in 1950. But experts thought it would cost too much to get the oil from the rock, and that only a tiny fraction would ever be recoverable in any case.

Of course, soaring oil prices helped to change the cost equation. And technological advances – in the form of hydraulic fracturing (‘fracking’) – meant more oil could be recovered.

Starting in 2007, several companies started to use fracking to extract oil cheaply. Others jumped on the bandwagon. As a result, production in North Dakota has shot up.

In January 2007, North Dakota produced a total of 3.56 million barrels of crude oil, according to the US Energy Information Authority. Six years on, this has risen more than sixfold, to 22.87 million.

Meanwhile, estimates of the oil that’s still to be had just keep rising. As late as 2008, the state of Dakota thought that no more than 2.1 billion barrels would be recoverable. That’s impressive, but not game changing. However, the latest official guess, released a few days ago, is that the figure may be more than three times higher.

This has already had a dramatic impact on North Dakota’s economy. Since 2000, nominal (ignoring inflation, in other words) state GDP has gone up by 120%. The labour market has also grown strongly, with wages rising by 80%. Currently, unemployment is only 3.3%, compared to a US-wide figure of 7.6%.

Those are impressive statistics. To get a more human impression of what it’s like on the ground, I talked to Robert Gavin, the managing director of Property Horizons, a company which is investing in accommodation in North Dakota.

The biggest impact has been on the oil industry labour market. Oil rigs don’t run themselves – they require skilled workers willing to work long hours in demanding conditions. As a result, companies are offering high wages for even low-ranking jobs.

Given that much of the rest of the US is in near-recessionary conditions, the promise of decent wages has drawn people from all over the country. Even so, the firms have had to cast their net worldwide. Gavin notes that during his visit to Dakota last year he saw oil workers onsite from as far afield as Brazil, Africa and Japan.

Of course, all these workers need places to stay and places to eat. So the services sector in nearby towns is also booming as the new arrivals start to spend their wages. According to Gavin, local restaurants are packed out from 10am to 4pm.

 Those who work in fast food branches close to the rigs are reportedly being paid up to four times the minimum wage.

The Big Risk: Energy Booms Always Turn to Bust

The big risk is that energy booms have a tendency to turn into busts. North Dakota has gone through this cycle several times over the past few decades, both over coal and then oil during the energy crisis. Last year, there were fears that falling natural gas prices would result in the shale gas industry collapsing.

But while shale gas has certainly battered prices, they are starting to rebound. After hitting a bottom of $2/MMBtu last year, gas prices are now over $4/MMBtu. Robin Batchelor of the BlackRock New Energy Fund thinks that this is a price at which shale gas producers can make a reasonable return.

At the same time, while oil prices may go lower in the future, the US is hardly going to turn its nose up at a ready supply of oil from a reliable domestic source. In short, we think this boom is set to continue.

Matthew Partridge
Contributing Editor, Money Morning 

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Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek

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