When the original 13 colonies gained independence from Britain, Americans relied on two main sources of energy: wood and horse power. Our energy needs have become far more complex in the 200-plus years since, but we’re once again getting closer to greater independence from foreign powers…this time from oil-producing countries in the Middle East.
While cutting off all ties from the Middle East may have been a mere pipe dream a few years ago, it is very much a reality today.
The Future of U.S. Oil Production
We’re now producing more oil and gas than Saudi Arabia. In just the last four years, crude reserves have climbed by 50%. Since 1999, natural gas reserves have doubled.
This reversal means that the U.S. is enjoying a long-awaited position of strength in the global energy landscape. And it means that when the 50th anniversary of the oil embargo rolls around in 2023, the U.S. is likely to be a net energy exporter.
If you add a little help from our two close neighbors in Canada and Mexico – also enjoying energy booms – it’s entirely possible that North America as a whole can achieve energy independence within the next decade
The impetus behind that growth – the fracking revolution and horizontal drilling – may not be overwhelmingly popular in all areas of the country. But becoming energy independent would be very popular indeed.
Of course, energy independence isn’t a goal that, once established, will continue indefinitely. As with any natural resource, U.S. oil production draws from a limited supply. The more we produce, the less we’ll have left.
It will be extremely interesting to see how well U.S.-based oil explorers and producers are able to replenish their reserves even as they ramp up production. As plans develop to build more energy production and export infrastructure, one has to question when this stage of the boom will run its course.
Still, as rampant domestic production reduces the need to import crude oil, it appears that investors should have at least a 10-year window within which owning quality U.S. onshore explorers and producers (E&Ps) is likely to pay dividends. I recommend participating in the trend but not turning a blind eye to the reality that the boom isn’t likely to last forever.
The key metric to watch is the reserve replenishment ratios – a measure that compares how much oil a producer added to its proven reserve base to how much oil it produced during the year.
A reserve replenishment ratio above one indicates that a company is adding oil, whereas a ratio below one shows that it’s “running out” of oil. Once we see this ratio dropping below one for a large number of U.S. producers, it will be time to phase out of these investments.
Don’t expect that to happen in the next decade. Until then, I strongly recommend adding domestic oil producers to your intermediate-term portfolio.
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