Is the U.S. Oil Boom Out of Balance?

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It's boom time in Texas. From the Eagle Ford shale to the Permian Basin, it's practically raining money.

Now you would think that would be a positive for the local economies. But as this boom unfolds, it is not without its own share of problems.

In its wake, the production largess in Texas has led to fast-rising electricity costs. This counterforce is wreaking havoc on localities across the region, especially small businesses.

In fact, a number of local non-oil end users have already reported a 20%-25% increase in electricity costs, with more expected to follow.

It is the other side of the latest Texas oil boom and it's an example of how energy costs can actually go higher as the volume of crude surges.

That's because drilling for oil is a very power-intensive undertaking, as are the associated services of maintaining pressure, operating separation and running the related initial field processing equipment. Not to mention the ancillary usages of electricity ranging from field office lighting to dust control.

As a result, the region encompassing El Paso in Texas and Las Cruces in New Mexico now has an expanding power deficit.

It is one of several examples how the resurgence of one energy source can result in adverse pressures on another...

Trouble on the Grid

In what is developing into a drilling frenzy - caused by a combination of rising crude prices and a greater reliance on domestic production to meet U.S. market demand - the increased power demanded has outstripped the ability of the regional grid.

As the demand for the power increases, so also does the price of that electricity.

And whenever this type of industrial demand ramps up, the greater bulk users tend to benefit the most. Even though overall electricity prices are increasing, the prorated portion earmarked for the largest user results in a net advantage in actual unit costs.

On the other hand, smaller (almost always local) businesses will realize a higher spike.

Now sometimes this will even out moving forward, as the profitability in the regional economy "trickles down" elevated sales and revenues to other sectors.

However, that is often not the case with oil and natural gas production, at least in the near and medium term.

That is because, while there will be some residual advantage to local service and material providers when the enhanced drilling programs are introduced, most of the profits move elsewhere.

And Texas is not alone...

What is going on with electricity in parts of the Southwest has been paralleled in other parts of the country.

The advent of rapidly advancing drilling expenditures has resulted in significant infrastructure and social services erosions, labor and material disruptions, combined with big increases in local inflation.

Already, parts of the Bakken and Williston basins in North Dakota and the Marcellus in Pennsylvania have provided examples of these types of dislocations. These have followed similar and earlier indicators from the Barnett between Fort Worth and Denton farther north in Texas.

I happen to have experience in all of these basins. And I can promise you that the distortions to the local economies remain well after the drilling has moved elsewhere.

U.S. Oil Boom: The Pain of 450% Inflation

Much of this is manifested in sector and regional inflation. With the arrival of large outlays at oil and gas plays, prices for all manner of commodities are raised, hitting local residents head-on.

In fact, I have encountered a number of examples of this over the past decade.

One happened in a small town in the Bakken where apartment rentals increased on average more than 450% in three months.

And there was an earlier experience I had in the small hamlet of Cresson, southwest of Fort Worth. The menu prices at the local diner had changed so often (always up), they were merely scratched out in pencil.

Another was provided to me by a colorful township committeeman in western Pennsylvania. "If I see another pickup truck with an Oklahoma license plate," he told me one morning, "I'm going to shoot somebody."

It seemed to me a rather distinct way of putting the local disappointment with the lack of well-paying drilling jobs.

But the same fellow noted another problem...

He recounted to me a (rather long) story about recent repairs to the pipes in his house that cost three times more than the last time he had them fixed. Why? "Because all the elbow joints are needed first up at the well sites," he finally told me.

Without exception, the worst situation as the drilling rigs pull into town is to be a resident on a fixed income!

These distortions are inevitable when massive investment changes take place in small communities. They also oblige that state and national officials provide adequate "impact fees" to those affected.

Robbing Peter to Pay Paul

But what is currently underway in places like El Paso and Las Cruces is different.

Here, they are experiencing a genuine rift in the system providing available energy, a rift itself resulting from the production of another energy source. Events such as these require we consider something else.

As I have addressed several times before in these pages,the energy balance is under strain in Texas and elsewhere.

That's why we need to stop regarding energies by their labels (oil, gas, electricity, coal; conventional, unconventional, alternative, renewable) as distinct sources.

Rather, the real objective must be to develop a genuine energy balance encompassing as many sources as possible, providing both interchangeability and integration. In this case, regarding the next energy breakthrough as the silver bullet to replace oil misses the real objective.

That objective has to be a widening network of sources in an interconnected network.

Otherwise, as in parts southern Texas and New Mexico today, we will just be robbing some of Peter's energy to provide for Paul's.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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