An energy renaissance spurred by natural gas shale fields as well as increasing production of crude oil has been a hot topic with US investment managers and economists recently. The positive contribution to recent gross domestic product is clear-cut. Predicting the future is much more difficult and that future is what I’m discussing today.
Let me step back and tell you a little bit about myself. I was born in the 1970s in North Texas. It’s a place where the horizon is the dominant feature of the landscape and in my opinion a very beautiful feature. Wide open spaces? Indeed!
Well this part of the world was the oil patch back then as is also the case today. Oil was liquid gold and Texas was in a boom. The economy was very much tied to energy back then. When things were very, very good, you could tell, even as a very young child. But I didn’t end up spending all of my childhood in Texas. The oil wells and their riches dwindled in the 1980s. What followed? There was a real estate bust and an economy and people’s lives which needed to be reinvented. With that, my family migrated to the Midwest for better employment options.
Newfound Technology & Sources Change Energy Landscape
So here we are today with another energy boom – this time perhaps more widespread. I recently read that the happiest state in the country is North Dakota (source: Gallup). You heard me right, North Dakota. How did North Dakota knock off the previous 4-time repeat champion Hawaii? An economic boom fueled by energy upswing had to be a big part. Forbes noted this January that North Dakota is the fastest growing state economy. But where to from here?
The forecast for future production and corollary economic impacts is difficult to predict. Bloomberg noted last month that the cost of production is continuing to rise. “Independent producers will spend $1.50 drilling this year for every dollar they get back.” That is rotten math! North Dakota – feeling good today – will have to create 2,500 new wells in order to sustain their current production of 1 million barrels a day. If you were in Iraq, 60 wells might sustain the same type of production. Reduction in yield of current wells, unknown environmental impacts, and regulatory swings are all variable factors.
Don’t Count Your Chickens Before They Hatch
Since the 1950s, a major concern of economists and environmentalists has been peak oil, the concept that at some point the global supply of oil will diminish. That makes alternative energy sources even more attractive. But even as traditional energy production has increased, demand for energy use is muted since the great recession. In May 2013, BusinessWeek reported on factors contributing to this “peak demand”. These included:
- Fuel efficiency initiatives throughout the world, especially in the US
- Growing viability of alternative energy sources
- Potential for increased prices dampening demand due to high production costs
It’s human nature to look at current trends and assume they’ll continue for a long time. In many minds, the Texas oil boom of my childhood looked like it would go on forever. It was unthinkable that people would need to trade in their prized possessions and lone-star optimism for a grueling decade where the Texas economy didn’t have a pulse. Discussing the current economic bump from changes in the energy landscape is part of our job here at The Center. Looking ahead, I’d refer to one of my favorite quotes from Danish physicist Niels Bohr, “Prediction is very difficult, especially about the future.”
Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011 and 2012, Melissa was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.
Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-006292