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Our Ingenuity Makes the Saudi Oil Prices Nervous

By Lewis J. Walker

NEW YORK (AdviceIQ) -- The irony is great. The United States, once a beggar to foreign oil producers, is now a big energy exporter. Even better, this trend is just getting started and it's thanks to good old American ingenuity.

The Saudi princes are nervous: 92% of Saudi Arabias annual budget depends on oil sales. The fear is that the energy boom in the U.S. and elsewhere, driven by improved seismic technology, horizontal drilling and fracking techniques, will diminish sales and the Organization of Petroleum Exporting Countries' dominance of global oil prices.

Horizontal drilling involves boring a well vertically from the surface to an underground oil or gas deposit reservoir and shifting the drill sideways to increase access to the formation. This allows greater production from a single well. While the concept is not new, it was only in the 1980s that the technique became commercially viable.

Hydraulic fracturing, or fracking, is a process that injects water, sand and sometimes chemicals into a wellbore under high pressure to create fractures in rock or shale, allowing oil or gas to flow. Fracking techniques advanced in the late 1990s and into the 2000s, and combined with improved vertical and horizontal drilling techniques, created a renaissance in energy production. Drilling prospects that were not viable before suddenly were. Witness the boom in North Dakota, Texas and parts of Canada.

The Financial Times opined that U.S. oil imports will fall to a 25-year low next year as domestic production increases and demand grows slowly. As America becomes more energy self-sufficient with reduced imports, we will see a major global geopolitical shift.

The surge in domestic supply has meant U.S. oil is cheaper than that produced overseas. In mid-December, Bloomberg reported oil futures at $109 per barrel for Brent crude -- which basically tracks North Sea-produced petroleum -- and $98 for West Texas Intermediate light sweet crude oil.

Clean-burning natural gas has environmental appeal compared with coal. The use of natural gas as a fuel in transportation fleets is growing. The Department of Energy has approved construction of liquefied natural gas shipping facilities, positioning the U.S. as a net exporter of natural gas.

The success in North Dakotas Bakken Shale and Eagle Ford Shale in Texas has spurred the development of pipelines, processing facilities and other energy infrastructure. This boosts jobs, investment and other economic activity that accelerates our economic recovery. Natural gas prices overseas are higher than in the U.S. Boosting exports could cause our prices to increase as prices move toward parity, but that will also spur greater production.

Drilling activity is picking up in the Gulf Coast states and in south central U.S. Canada has vast untapped shale reserves. Mexico also has significant shale deposits. Asian markets are eager for surplus North American gas. All of this potential may diminish the power of Russia and unstable Middle Eastern states as energy suppliers.

Over the next five to six years, as technology advances further, the shale boom is likely to spread to China, Ukraine, Argentina, Australia and Algeria, expanding oil and gas supplies and restraining prices that often jump in the face of Middle Eastern turmoil. China is eager for gas production to offset the use of coal in power plants.

Reuters reported recently that China will replace four coal-burning power plants in pollution-plagued Beijing with natural gas-fired facilities in an effort to clean the capitals notoriously dirty air. Smog has deterred tourism and international business executives have spurned relocation to Beijing and other cities in China based on growing reports of choking pollution.

Dirty coal produces about 70% of Chinas power. The goal is to cut coal burning to below 65% by 2017 in the face of rising health problems from harmful particulates and citizen protests over all forms of air, water and soil pollution.

Dependable and potentially lower-cost energy supplies increases Americas appeal as a manufacturing and distribution hub, while expanding jobs and investment opportunities. We are a long way from the dour forecasts of recent ilk. Good news all around.

-- By Lewis J. Walker, CFP, president of Walker Capital Management and Walker Capital Advisory Services in Norcross, Ga., a registered investment adviser in securities and certain advisory services offered through the Strategic Financial Alliance. Walker is a registered representative of SFA, which is otherwise unaffiliated with Walker Capital. 770-441-2603. .

AdviceIQ is a network of financial advisers that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisers have no regulatory infractions.

AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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