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Oil Prices Are Headed Lower, or Maybe Much Higher: Chesapeake Energy Corporation (CHK) and More

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Chesapeake Energy (CHK)Look up the definition of “cyclical” in your handiest dictionary, and you just might note a picture of a drilling derrick. Little, it seems, can turn on a dime as precipitously as our perception of future supplies and prices of both conventional and renewable energy.

A half-dozen years ago I penned an article for The Motley Fool suggesting the establishment of a Manhattan Project-style program stocked by experts in energy and science to develop ways to survive what appeared to be rapidly and precariously declining oil and gas reserves. At that time, crude prices were rocketing toward their eventual top of $147 per barrel, after which they immediately reversed course and plunged by about three-fourths.

Chopping imports
Now, however, prognostications of a glaringly rosy future for the U.S. energy scene are popping up like weeds in granny’s garden. For instance, early this month Citigroup commodities guru Edward Morse unleashed a report — “Energy 2020: Independence Day” — which engendered all manner of euphoria across the fruited plain. His contention is that major shifts in the geological and economic landscape are likely to result in steady increases in U.S. and Canadian oil and gas production. Those increases will be augmented by declines in demand for hydrocarbons on our continent. The result will be a material reduction in crude prices worldwide.

We’re not talking here about the first effects of these changes being felt in the outlying years. Morse forecasts a slide of $10 per barrel from current crude prices by December.

Then again, maybe we’re already feeling those effects. As Morse points out, since 2006 imports of oil into the U.S. have tumbled from 12.6 million barrels a day to about 6.8 million barrels per day currently. Conversely, in that identical time frame, our domestic production of crude, natural gas, and bio-fuels has jumped by three million barrels per day.

As Morse says: “A half decade from now combined U.S. and Canadian output will be in surplus of projected needs. Over the next five years, demand for natural gas in the U.S. should catch up with supply … igniting a reindustrialization of the country.” This year alone, the U.S. is expected to knock down its oil import numbers by about 700,000 barrels per day.

But Morse isn’t the only painter of smiles on the faces of economists and energy consumers — which obviously means all of us. Just last summer, the U.S. International Energy Agency, or IEA, predicted that the U.S. will surpass both Saudi Arabia and Russia as the world’s most proudly prolific producer by 2017.

A totally different take
Not everyone is in wholehearted agreement with Morse and the IEA, however. For example, energy seer and investor Bill Powers has a book docketed for spring publication. It bears the ominous title “Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth.” As you might expect, his thesis is that “…the importance of shale gas has been overstated; the U.S. has nowhere close to a 100-year supply. The myth has been perpetuated by self-interested industry, media, and politicians. Their mantra is that exploiting shale gas resources will promote untold economic growth, new jobs, and lead us toward energy independence.”

He continues by forecasting a sharp and imminent fall-off in shale gas production: “[The resulting] decline [in gas availability] is a setup for a gas crisis, a supply crunch that will lead to much higher prices, similar to what we saw in the 1970s.” Clearly that prediction of a hydrocarbon Armageddon could have a salutary effect on much of the energy sector. I’d include, for instance, Exxon Mobil Corporation (NYSE:XOM), currently the largest U.S. natural gas producer, Chesapeake Energy Corporation (NYSE:CHK), which has been struggling to boost it liquids output, but still generates about 70% of its revenue from gas, and perhaps Royal Dutch Shell plc (ADR) (NYSE:RDS.A), which has arrived at a production that is now about half natural gas.

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