Fracking and horizontal drilling, despite being around for half a century and one decade respectively, have taken center stage in economic and political discourse over the past several months.
The use of these two oil drilling technologies has facilitated successful shale plays in North Dakota and other oil rich areas in the U.S. In view of this, U.S oil production is expected to boom and analysts, doing what they do best, project that despite the economic benefits, increased oil production could hurt fast rising alternative energy plays. This argument is based on the idea that oil prices will dip and oil supply will outstrip demand, pushing local consumers away from green alternatives and back to fossil fuels.
Increased U.S oil production, however, will have minimal impact on alternative energy plays. Your investments are safe in alternative energy and could in fact even continue growing at a hastened pace going forward.
Here is why.
It is an Export-Import business
China, which remains a key importer of oil, has increased demand for oil from 5 million barrels per day in 2001 to more than 10 million in 2012. The Energy Information Administration however expects China’s oil demand to grow only 4.1% this year, which is too low to bridge the U.S import gap. Furthermore, high global prices have set the stage for more efficient alternatives in China. However, this will not hurt the U.S’s export business as more developing countries are waiting in line behind China; countries that could be as transforming to U.S’s oil export business as China has been over the past 15 years.
In addition to developing countries like China, which exhibit significantly high demand, there is an internal push from different stakeholders to bridge the U.S import gap; not by reducing imports, but rather by increasing exports. This explains why there is a push for the completion of TransCanada’s Keystone XL pipeline, which will bridge the infrastructure gap and greatly improve the efficiency of exportation.
Most importantly, the import-export business helps the U.S build strategic alliances and partnerships- which it needs as leverage for other equally important geopolitical interests.
Local prices unlikely to stagnate
Despite the argument that increased U.S oil production will halt the oil price increase, it is very unlikely. This is because oil exploration companies spent so much money last year on exploration so that the output, despite increasing incredibly, returned a negative return on investment.
Exploration companies spent $186 billion in exploration in 2012, a 20% year-on-year increase. This however yielded a 13% percent increase in reserves, leading to the negative return on investment and a cumulative loss of $26 billion for oil exploration companies in the year.
If the negative return on investment is anything to go by, reduced prices are the last thing that oil exploration companies and in general the supply side wants. And considering that local oil prices are for the most part a function of global prices, the supply side will have its way.
Local prices are unlikely to stagnate and local demand is unlikely to affect alternative energy plays.
Alternative energy plays continue gaining momentum
SolarCity Corp (NASDAQ:SCTY), in a late February move, announced the establishment of a joint $65 million fund with Honda that would go toward solar projects for Honda and Acura customers. The main aim of the fund is to assist Honda and Acura customers to bear the initial cost of solar power installation, which is still prohibitively high. This offer will act as bait to thousands of homeowners and will increase both companies footprint. Furthermore, this is just one of the many moves that both companies are making to sustain, if not enhance, the current country wide shift to greener options.