In recent years, we’ve seen what happens when gigantic speculative “bubbles” build up, whether in the high tech sector or in the housing market. Eventually, the bubble bursts, and a lot of people get hurt in the process. Now, an article in Bloomberg is raising the possibility of a similar phenomenon occurring with oil and natural gas shales.
Surging prices for oil and natural- gas shales, in at least one case rising 10-fold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc.
Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields where too few wells have been drilled to assess potential production, said Sven Del Pozzo, a senior equity analyst at IHS Inc. (IHS).
This may be ok for now; but eventually, as the Bloomberg article points out, “The quirky nature of shale geology means the risks are high that an investment made in a sparsely drilled prospect will go bust.” And if that happens — if and when the “bubble” bursts – a lot of people stand to lose a great deal of money from what seemed like a great investment at the time.