UPTHINKING FINANCE

• [4:39] Learn more about Cushing Asset Management
• [7:31] Why the energy sector plays a huge role in the economy
• [11:11] Dissecting the influence and impact of OPEC
• [13:16] The two common types of drilling for oil
• [17:46] How the green movement will impact the future of energy
• [25:36] Why the price of natural gas is immensely volatile 
• [27:32] The political impact on the rising price of gas
• [32:13] Where is the energy industry headed? 

At some point, Chris points out that the world will start to run out of oil. We may completely deplete oil from the planet. The Saudis do conventional drilling and draw from a pool from an underground oil reserve (it’s like sucking the oil out with a straw). The US mainly engages in hydraulic fracturing. 

Oil drilling was a risky business before this technique was developed. With hydraulic fracturing, you put the drill bit down two miles (10,000 feet) and then turn it sideways and drill out two miles. This allows you to “sweep” the area so you never miss. 

With hydraulic fracturing, you get the most production from a fractured well in the first 2–3 years, and then production declines quickly. Because of the way these wells work, you consistently have to drill new wells to keep production levels steady. It’s expensive and requires a lot of capital upfront. Oil companies are motivated to drill to maximize profits and that’s the simple reality. 

There is a transition taking place. However, the problem is that the green movement is trying to flip the switch too quickly. Many countries can’t meet the demand for green energy. Chris points out that only 3% of power today is generated from non-carbon fossil fuel sources. 

Because of this, banning fracking is impractical. Globally, oil is mainly a transportation fuel. Chris believes that there will be a day when oil is unimportant to the world. But Chris isn’t sure that will happen during our lifetimes. 

Natural gas has greater longevity. Why? Because when you drill for natural gas, you get a dry gas (methane), which is converted to electricity. The US has reduced its carbon footprint by reducing power generation from coal to methane. Methane now contributes to 40% of power generation in the US. 

Wet gasses that are drilled include butane, propane, and methane. Butane is common in lighters. Propane is used as a source for heating and cooking. Methane gas is one of the main ingredients in plastics. 

Chris emphasizes that “If you ban fracking…you would send the price of all energy into the hypersphere, creating massive inflation and a global depression—as if we were living in 1875.” 

Recently, because of the pandemic and energy policies in Europe, the price of natural gas has skyrocketed from $2 to $60–$70 in Europe. It’s $9 for 1 million BTUs in the US. 

The US has been releasing oil from its reserves. It has been very inflationary, which hurts the people who can afford it the least. So instead of taking multiple trips to the grocery store, they may only be taking one. Or they’re opting to stay home more. Recession fears have played into it. At the end of the day, Chris points out that the price of oil is only about half of what we pay at the pump. What does the journey usually look like for distribution? 

The oil that comes out of the ground is priced by the global market. This oil is transported in a truck. The trucking company takes a profit to deliver the oil to the pipeline. Then the pipeline takes their cut. The refiner takes the oil from the pipeline and refines it to heating oil, jet fuel, or gasoline and they take their cut. 

The final product is then sent back into another pipeline. Only then do local depots truck the oil to gas stations. And once refined gas gets to the gas station, both federal and state governments tax it. The price has easily doubled by the time it is pumped into your car. 

The administration seeks to vilify energy producers and claim they have far more control over the price at the pump. But the reality is that every business has to cover its costs and make a profit to stay in business. 

Where is the oil industry headed? What is the influence of OPEC and the IEA on the energy industry? Listen to the whole episode to learn more about what impacts the pricing of oil & gas and how it impacts you. 

Chris Pusak is not affiliated with or endorsed by LPL Financial or Capital Investment Advisers.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.

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• OPEC
• IEA

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