Yesterday, we learned that inflation is still bubbling away under the surface. It’s now at a nine-month high of 2.8%, according to the Office for National Statistics. Why? Well, mainly it’s the soaring cost of energy.
Long-term readers will know that I’m an energy bull. The world is filling up with people, and those in Asia are getting much richer.
Handy, then, that there’s a revolution happening in the energy markets...
A revolution in energy markets
I’m sure you’ve heard about shale gas. Basically, new drilling techniques now allow us to release previously inaccessible energy held in shale rock. It’s led to a glut of gas production in the US.
But for investors, it’s been a bit of a struggle to make any money out of this boom.
As the chart shows, US gas prices have plummeted over the last couple of years. The new gas drove prices down and down. Some thought that this would lead to a boom for the producers... but they’ve been severely disappointed.
If you look closely at the chart, though, you’ll notice that recently gas prices have been ticking up.
As is so often the case, those that rushed headlong into the latest ‘thing’ ended up with losses. But by my reckoning, the worst of the price falls are now in. Things are looking up for this industry. Especially here in the UK, because George Osborne has made it clear that Britain needs to be at the forefront of the shale gas revolution.
Here’s what I see coming...
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The three game changers for gas
The biggest problem with oil and gas is that when you drill a well, you can’t just switch it on or off depending on how much the markets are willing to pay for your energy. The economics just don’t work that way.
Once you start pumping oil or gas, you have to keep pumping. And as we’ve just seen, with all the new gas fields in production, that’s been a disaster for gas prices in the US. It's meant that over the last couple of years, producers have been less inclined to explore and develop gas production.
But the good news is that production is now starting to come under control. I suspect that’s what’s finally started to cause a rise in gas prices.
The industry is now on a more sustainable path... but gas is still cheap. Which brings me to the second game-changer...
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As an energy form, gas is now some 75% cheaper than oil. And that’s led to huge changes in consumption. After all, gas is also cleaner than oil and now that it’s considerably cheaper, the big energy users are looking to profit from the situation.
In his autumn Budget statement, Osborne said that we’ll be looking to build 30 new gas electricity plants. And the UK desperately needs this infrastructure. Ofgem reckons that without a considerable investment, it could be lights out for Britain by 2015. That’s not very far away!
The point is, demand for gas is set to soar. Expect to see more gas-fuelled cars, buses and trucks too. And what’s more, this could all be home-grown energy... and that’s the third game-changer...
This government is dead keen to tap what could be the UK’s biggest ever ‘get out of jail free’ card. Looking back, much of the North Sea oil and gas production was squandered. Peak production ran as energy prices were on the floor. Now that energy prices are higher, North Sea production is waning. Let’s not even get into the debate about where much of the proceeds of the UK's oil boom went!
We desperately need a second bite of the cherry. And the gas revolution could be just that. Osborne knows it, and he’s putting in place measures to make sure the UK is at the forefront of shale gas production. In fact, I expect we'll learn more in today’s Budget.
The ‘trade of the decade’?
There are many ways to play the potential gas boom.
There are the infrastructure plays – quoted companies set to build out the new electricity plants and infrastructure demanded by government.
The explorers are making hay too. Recently I showed readers how North Sea oil producer EnQuest is raking in the cash as it uses all the latest drilling techniques to drain the last drops out of maturing North Sea fields.
My colleague David Stevenson has been hounding this story for a long time now. Whenever I meet him he always finds a way to bring the conversation around to his big gas play! He’s found a way to play it that he thinks is the ‘trade of the decade’… and I think he has a point. Click here to judge it for yourself.
This is an industry full of promise. Played right, we could be energy self-sufficient for decades to come. I’ll certainly be keeping a beady eye on the dramatic developments in the industry... and, of course, how we might profit from it!
For the moment, let’s see what Osborne says today.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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