U.S. Has Earth’s Largest Energy Resources

What is your view of why we leave the majority of our resources in the ground, instead of drilling and mining to lower prices?

For the most part, it is simple economics.

First, they are expensive to get out, with rare exception.

The market for those resources has to be forseeably good enough in the future to justify the investment of capital today, often extensive, before a dime can be brought in in revenue. A Bakken well costs some 6 million dollars to complete, and that total can go higher if there are problems while drilling.

Before such investments are made, there has to be some credible promise of a return on the investment to justify the risk. And there is risk. An assortment of problems can happen, none of which lead to an environmental problem, but which will mean a well may not produce as well as hoped--if at all.

While, statistically, the Bakken is way beyond any other formation I have drilled in terms of successful completions compared to the number of wells drilled (over 95%), the numbers get far worse inother areas, some as low as one exploration well in 75 producing or leading directly to field development.

Mining has its problems, too.

Environmental regulations, ore body delineation, variations in the composition of the ore, the acquisition of and construction of ore processing facillities, and the cost pf processing concentrates, just to name a few.

Complaints are common, often baseless, and environmental organizations will cause delays through litigation that can add millions of dollars and years to the expense and time needed to develop a project, often to the degree that the company goes bankrupt or drops the project entirely.

It isn't that the resources aren't there, it is that the cost, inflated through the lawsuits, and the delay in any return on investment make the project unattractive despite the raw development potential.

The New World Gold Mine in Montana was one such.

Coal sufers similar problems.

It is no secret that environmentalist organizations oppose virtually any development of natural resources, be it drilling, digging, or even just cutting timber (a renewable resource).

The NIMBY factor comes into play as well, with most not wanting development, even of resources they desperately need to maintain their lifestyle, anywhere close to where they live.

Some people give no thought to how that electricity comes out of the wall socket--they just don't want a power plant nearby.

Keep in mind that behind every project is someone or a group of someones willing to risk money to make money, but they want to get a reasonable return on the money they invest. Sure, there are no guarantees, but the investment capital comes faster if there is a reason to believe there will be a return. It is not the job of the producers to necessarily lower prices, although the Laffer Curve applies (the margin to volume relationship which essentially shows that there is an optimum price to maximize utilization and profit). Other factors such as overall economic health apply and affect the likelyhood of a product being used at all.

Remember, No one drills or mines to lower prices. This isn't a charitable occupation. They drill or mine in order to make money, and as others do the same thing, there is more of a given commodity in the supply chain, and the bid price drops because more is available.

When the supply dries up, bid prices go up, investment in new ventures is more attractive in terms of producing a good return, and development and production of new deposits increases, maintaining a sort of market/supplier equilibrium, if government does not overregulate production, or other geopolitical factors do not cause a shortage which causes the price to spike.

While boom/bust cycles may benefit speculators, they can be really hard on an industry overall, and harder on those who work there.

It is far more efficient to maintain a relatively stable market and keep developing the next generation of personnel to replace an aging workforce.

However, with all that in mind, there is a monkey wrench in supply/demand economics, namely governmental involvement.

Either through regulation, controlling access to resources (the US Government owns some 240,000,000 acres and the mineral wealth in them), or judicial rulings favoring environmental groups often headquartered hundreds or even thousands of miles away, the government can (and has) shut down the development of supply of everything from offshore oil, to rare earth elements and precious metals, to lumber to build homes.

Similarly, the government has added to the cost of things like light bulbs and vehicles by mandating specifications which are expensive. While it might have been up to the consumer to decide if the changes in those products warranted the additional cost, the lack of available alternatives due to governmental mandates has led to the expenditure of countless dollars on products which comply.

You decide whether it is worth it, but eventually the only choices are to spend the money or do without.

There again, we see the hand of government in raising prices.

As it looks from the ‘cheap seats’, Geopolitical factors will affect the marginal reserves available in the near future. Where the islamic oil producers of the Middle East and Africa settle out may determine where prices stabilize, if they stabilize in the short term. Petrobras’ offshore eforts will make some difference, as will domestic drilling and the tar sands play, but they may not be enough to keep up with demand.

There are a number of variables short term which make prediction problemmatical at best:

devaluation of the dollar

economic health affecting demand

regulatory concerns/moratoria

rig availability

Long term, the outlook is pretty good providing the economy stabilizes or shows signs of recovery, and the potential for profits has a definite upside. For that reason, rig counts in North Dakota are at an all time high (in over 50 years), and the Bakken/Three Forks drilling is going strong.

It is however a definite possibility that Obama will get his $5.00 gasoline, but I think it will stop short of that in most of the lower 48. The flyover states will lag behind the coastal states, partly because the landlocked supply is less fungible, refinery stocks are stable and adequate, and that lowers crude prices. Note the discrepancy between Brent and WTI, and you will see that effect in play at the wellhead, which passes on to the consumer. It is possible that the government will take up that slack with additional taxes as the feds and some revenue hungry states add taxes.
I do not expect much in the way of fuel price relief in the coastal states (East/West), and prices there will generally be higher than in the midwest.

Now I may be wrong about that, but if I was writing up a budget for the coming months, I would estimate fuel costs at current area prices plus anywhere from a quarter to fifty cents for the coming year. I actually hope that won’t be the case, and I normally budget for a small year-end surplus rather than an operational shortfall. A little slack in the system reduces stress tremendously.
A little pre-planning can help reduce fuel consumption by enough that the dollar amount remains about the same—combining trips in such a way as to reduce mileage, arranging appointments to take advantage of miles already travelled.
Note, I am just a geologist not an investment adviser, YMMV.

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