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| English: The headquarters of Occidental Petroleum Corporation in Westwood. (Photo credit: Wikipedia) |
Los Angeles, May.24, stock trade .- It's easy for articles about the shale boom to get lost in the shuffle.
After being flooded with articles (each more optimistic than the last), it's no wonder some investors have started to become desensitized to any oil-related news. After all, we've already learned that the U.S. is on track to become the world's top oil producer -- you can't have a much larger revelation than that.
Not to mention that you've likely seen a lot of superfluous adjectives used to describe the state of North America's shale production: booming, gushing, staggering, etc.
But a report issued last week from the International Energy Agency (IEA) just might be the biggest eye-opener yet.
According to the IEA, aggressive development of reservoirs like the Bakken Shale and Eagle Ford Shale has unleashed a wave of new supplies that is "sending ripples throughout the world." And the far-reaching implications could be unlike anything we've seen.
When the IEA talks, the market listens. And the Paris-based organization isn't just talking -- it's yelling.
How else would you interpret an opening statement like this:
"The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15."
Without context, that statement could be lost on some people, so here's the story:
Fueled by powerful double-digit economic expansion, China has emerged as the world's largest energy user.
As you can see from the chart below, China's oil consumption has surged to 10 million barrels per day, far outpacing domestic production. The widening gap between the two is being filled by rapidly growing imports. In other words, approximately 6 million barrels of oil a day are being pulled out of the global supply stream and diverted strictly to feed China's appetite.
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Needless to say, China's demand has dramatically reshaped the global energy picture. Now, if the IEA is right, U.S. shale production could trigger a similar overhaul from the supply side.
The latest forecast has global oil consumption climbing from 90.6 million barrels per day now to 96.7 million per day by 2018. That means we'll need to dig up an additional 6 million barrels per day to accommodate rising demand.
The Organization of Petroleum Exporting Countries (OPEC) is equipped to handle that challenge. OPEC members hold about 6.4 million barrels per day of spare production capacity that can be turned on if necessary. But the cartel's influence might be waning, since non-OPEC daily oil production is expected to be 6 million barrels higher in 2018 than it is now.
In other words, we don't need any incremental oil production from OPEC.
Fully two-thirds of the projected increase (about 3.9 million barrels per day) will come from the United States. Non-conventional basins like the Eagle Ford in Texas and the Bakken in North Dakota won't muscle OPEC out of the market, but they will make it difficult for the organization to boost production without deflating prices.
As we know, none of this would have been possible without fracking and horizontal drilling.
The IEA characterized fracking technology as a "bonanza" that will unlock other sources and lead to a broad reassessment of global oil reserves. Funny they should choose that word, considering that's exactly how I referred to the situation in my second Scarcity & Real Wealth issue back in April 2011.
So what does this mean for investors?
First, I should note that there will be winners as well as losers from this development. With new supplies flooding the market, I doubt benchmark crude oil prices will revisit former highs near $150 per barrel anytime soon.
But I don't invest in producers like Occidental Petroleum (NYSE: OXY) because of an expected increase in oil prices anymore than McDonald's (NYSE: MCD) stockholders are hoping for skyrocketing Big Mac prices. Well-positioned producers like Occidental (which has a large position in California's prolific Monterey Shale) have aggressive growth plans in place and can be quite prosperous even in a flat price environment.
But the real winners from this global shake-up are the companies that handle the day-to-day business of drilling, transporting and storing the millions of additional barrels that will soon be coming to the surface.
And that's exactly where we'll be focusing our attention in the coming months. Stay tuned...
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