It is now fashionable to call America the new energy “powerhouse”. The fracking companies in the USA have certainly been producing more oil and gas over the last 10 years with their new technologies to extract energy from “tight” places. They have done this by pumping huge amounts of oil, sand and chemicals below ground. But their companies have had to raise enormous amounts of debt and equity capital to fund that expansion. Now there is a problem and it is old one in business — insufficient profit (or lack of profit altogether).
The price of West Texas Oil was US$ 105 per barrel 5 years ago. In 2016, it fell to just US$ 30 and it is now $ 55. These are the harsh realities of the energy world. During that 5 year timeframe, the Natural Gas prices have halved.
West Texas Light Crude Oil price over 5 years
West Texas Light Crude Oil price over a longer time frame of 12 years
And here is the Nymex Natural Gas price over the last 12 years
The price charts tell the story.
The amounts of capital raised last year by the US fracking companies was just $ 22 Billion — about half of what they raised in 2016. Investors have become more wary and are looking for returns. The problem is that unfortunately it appears that shale drilling is actually unprofitable for many companies. The energy comes out of the ground but the money pumped in to do so simply overwhelms it. In other words, costs overwhelm the potential for profit. This is a perfect illustration of the concept called EROEI — Energy Returned on Energy Invested but in a financial sense.
Cheap finance (low interest rates) which has been the norm since 2008 sounds good but only if it is combined with high oil and gas prices to produce the miracle of high energy profits. With global economic growth slowing especially in Europe, the prospects for higher energy prices in the near future look grim.
Make your own conclusions, do your own research. Avestix does not offer investment advice.
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