Richard Vodra, is a lawyer and Certified Financial Planner™ and the president of Worldview Two Planning of McLean, VA. He recently published an article “Is Fracking a ‘Happy Solution’ to our Energy Needs?” In this article he brings up a variety of issues that the U.S. faces with the production of natural gas from fracking. Fracking involves injecting steam and other chemicals into shale or sand deposits deep underground to extract oil products and natural gas.
Vodra’s primary points:
1) The price of natural gas in the U.S. is currently too low. On Friday, February 22, 2013, the spot March 13, 2013 contract price was $3.28 per thousand cubic feet of natural gas. One barrel of crude oil has about the same energy content as 6000 cubic feet of natural gas. The spot price for a barrel of West Texas crude oil for the April 13, 2013 contract was $93.13. The equivalent price of natural gas was $19.68. No natural gas producer can make money at this rate as break-even price for producing natural gas is thought to be between $6 and $8 per thousand cubic feet
2) The cost to drill a natural gas well is too high. According to Vodra, a typical fracking oil well in Texas now costs over $10 million to drill, compared to less than $1 million for a conventional oil well.
3) It takes too much energy to get the gas out. Traditional (oil) wells have a ratio of energy returned on energy invested (EROEI) of 10- or 20-to-one, or an energy cost factor of 5 to 10%. The EROEI with fracking is in the range of 5- or 10-to-one, or a cost factor of 10 to 20%. This cost factor is too high to be sustainable.
4) Fracking uses millions of gallons of water per well, most of which is unusable thereafter because it is too polluted. There is competition for water rights between oil companies on one hand and farmers and ranchers on the other.
5) Fracking might be making the earth less stable. Earthquakes in areas that don’t commonly have them, including Ohio and Oklahoma, have been linked to fracking activities nearby.
6) The life of a fracking well ends quickly. A conventional well’s production declines at about 5-8% per year, and it can remain productive for decades. By contrast, the first-year decline in shale wells is over 60%, and about 90% of a well’s production occurs in the first five years. That creates a “drilling treadmill,” as new wells are needed simply to replace production from wells drilled a few years before.
The leaders of many public utilities across the U.S. are betting that the costs of natural gas will remain low. They are re-thinking their decisions to run coal fired power plants and older nuclear power plants and are often choosing to shut them down because they are either too expensive to run, or they don’t meet stricter environmental regulations. Many of these will be replaced by cleaner burning natural gas plants that are today much cheaper to run.
Given the list of the six key concerns about natural gas listed above, we wonder how long the pricing advantage of natural gas can last for U.S. consumers and what will happen to the largest users of natural gas when the costs for equal amounts of oil and natural gas are more equivalent?
Additionally, the National Geographic cover story in the March 2013 issue also looks at fracking, specifically in North Dakota, and examines at what cost the fuel supply is being expanded.
~ Allyn Hughes, CFP®, ChFC®, CLU® — Brooks, Hughes & Jones, Partners in Wealth Management – Tacoma, WA
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U.S. debt fuels flames of the “ring of fire”
The economy was front and center Wednesday night as President Obama and challenger Mitt Romney took the stage in Denver for the first debate of this election season. No doubt subsequent debates will center on other issues, but I suspect that the economy will be incorporated into every event because “it” is the subject of this election.
Yesterday a copy of this month’s Investment Outlook written by Bill Gross crossed my desk. Bill Gross, as many of you know, is the Founder (1971) and Managing Director of PIMCO mutual funds. He could be called a “bond guru” as he manages hundreds of billions of dollars that are invested in an assortment of bond instruments. His opinions are backed up by performance and experience. When he says, “I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them”… well this gets my attention.
Gross has been studying the annual reports of the International Monetary Fund (IMF), the nonpartisan Congressional Budget Office (CBO) and the Bank of International Settlements (BIS), which describe the financial balance sheets and prospective budgets of many nations. He compiled all three studies into one “ring of fire” illustration to show relative financial health of the various countries. In the relative healthy ring are Brazil, China, Mexico, Canada and Russia. In the unsustainable “ring of fire” are Spain, Greece, Great Britain, and…you guessed it, the United States. We are second only to Japan in the developed world.
To close this “fiscal gap” would require a combination of increased revenue and decreased spending amounting to $1.6 trillion per year. “We need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to ten years.” So far the President and Congress haven’t even been able to agree on a solution that arrived at one-fourth that amount. And if one were to add in the unfunded future liabilities posed by Social Security, Medicare and Medicaid, the actual debt of the U.S. is a whopping four times higher than the $16 trillion we hear on the news.
To quote Gross, “the U.S … has been inhaling debt’s methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult … If the fiscal gap isn’t closed even ever so gradually over the next few years … the damage would likely be beyond repair.”
The complete Investment Outlook including the graphic “ring of fire” is available here.
I sense we as a culture are facing a time of mutual sacrifice on the order of World War II. Every citizen is going to feel the pain for us to get out of this fiscal mess. It can be done. I’m listening to see if any of the candidates has the “nerve” to speak this truth. Our future depends on honest leadership. We as a people are up to it, but we don’t have the leisure of waiting. It is our turn at bat.
~ Nancy Jones, CFP® – Brooks, Hughes & Jones – Partners in Wealth Management, Tacoma, WA
www.BHJadvisors.com
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