how to prepare for rising energy prices

Something major changed at the end of 2019. You didn’t notice it. Nobody did, really. What changed? That change has led me to believe that energy costs going forward for gasoline, heating oil, and electricity are about to start going up in a major way. Hopefully, I can explain what changed in a way that isn’t too confusing, and what we, as homesteaders, can do to prepare for rising energy prices.

Were you around eleven years ago when gasoline cost over $4 per gallon in the United States? Did you know that a unit of natural gas went for $15 at that same time? Then the high prices just went away. It felt like America dodged a bullet. The reality of the 2008 financial collapse and “The Great Recession” made those memories of high energy prices seem more like a dream than something that really happened. Now, gasoline runs $2.50 per gallon and natural gas in Texas costs less than $3 per unit (MMBTU).

If you ask the average person why gasoline prices went so high, so fast the answers you will often get are: “It was about the Gulf War.” “It was oil speculators.” “It was part of the economic bubble.” Or even, “It was political.”

The real answer is that the people “in the know” saw a serious and perpetual oil shortage on the horizon. It was known as “Peak Oil” which basically said the world would want more oil than it could make. The same was true of natural gas in the United States. The consequences of that permanent energy shortage were going to be significant and long-lasting.

The prediction of an energy shortage didn’t happen. It didn’t happen because of “fracking” or “unconventional oil.” Another term for “unconventional oIl” is “really expensive oil.” For conventional oil, they drill a well down about a mile and then pump out oil. It’s easy and cheap. With fracking, they drill a well down a mile then drill in each direction about two miles. Then, they pump 100 train cars full of sand and water down the well with pumps equivalent to 25 firetrucks to “fracture” the rock.

With a regular oil-well, once they drill the well, it produces oil for years or even decades. With fracking, the well produces good oil for 10-15 months then it drops to a dribble. They move the entire operation over a little way then repeat the process all over again. All the same equipment leases, manpower, raw material, and energy being used over and over again to get a little oil out of the ground. It’s really expensive compared to conventional oil.

Believe it or not, that system has worked really well for the past ten years. The only problem was that it’s not profitable.  Wall Street investors lost $500,000,000,000 between 2012 and 2017 in the fracking industry.  That’s $500 billion. The oil producers kept promising profits if they could just drill faster and put in more wells. In other words, “Give us more money and we will make a profit.” The oil companies sold that idea for quite a while.

The thing I mentioned that changed at the end of 2019 is that Wall Street decided to stop dumping good money after bad into the fracking industry. The money started drying up. The Texas oil industry lost over 8,000 jobs in 2019. Energy companies and service providers are going bankrupt at increasing rates. Chesapeake Energy (one of the largest and most pioneering fracking companies in Texas and Oklahoma) essentially said they will be going under soon.

The energy needs of the world are like a giant swimming pool that keeps getting bigger and bigger each year. The only way to fill it up is with more and more oil, coal, and natural gas than the year before. What happens when the year comes that we can’t do that?

That question—“What happens if we can’t produce as much oil and natural gas as the world needs?”—was what caused the energy prices to jump in 2006-2008. The answer is: energy gets substantially more expensive.

The Coming Energy Shortage

In the U.S., conventional oil and natural gas production rates have been dropping for decades. The reason our oil and natural gas production has gone up in the past ten years is entirely due to fracking or unconventional oil production. The problem with fracking is that it costs more than the oil is worth. That extra cost comes in the form of losses for the investors. What happens when those investors get tired of losing money?

When investors stop giving the fracking industry money to burn then the fracking companies either go out of business or they cut back on production, focusing on just the most profitable locations and wells. This is what is happening right now.

Because money is drying up in the fracking fields, the oil and natural gas produced by frackers will start to decline. In a world where increasing energy use meets decreasing energy production, the result is higher prices. Will it be as bad as 2008? There’s no way to know.

In 2008, nearly 50% of the electricity in the U.S. was generated by coal.  In 2018, that number was down to 25%. What filled the gap? Natural gas. Now natural gas generates 35% of the electricity in the U.S. while coal is down to 25%.

Why does this matter? Coal-powered electricity-generating plants have been replaced nationwide by cleaner, cheaper natural gas plants. This only works if natural gas prices stay low. In 2008, natural gas cost FIVE TIMES more than it does today. That’s because natural gas is a by-product of fracking for oil.  In some fields, there’s so much natural gas that it’s burned off in giant flare towers.  It’s not even worth selling!

When fracking for oil goes down, the amount of natural gas produced will also decline. Declining natural gas production in the face of a nation that depends on natural gas for electricity production means higher electricity prices. This is already happening in the northeastern U.S. because natural gas pipelines from Texas don’t have the required capacity.  This winter, natural gas prices in the northeast have gone up to $15 per unit again.

How to Prepare for Rising Energy Costs on Your Homestead

These rising energy prices will affect gasoline, heating oil, propane, natural gas, and electricity. The first answer is to start looking at how you can reduce your use of these items.

A few years ago, I cut my home electricity use by 60% by just becoming more efficient. After that, I added solar panels, which saved another 15%. Becoming more energy-efficient was more valuable than installing a solar array. I actually got my electricity bill down to $23 per month in the fall and winter.

Another major way to offset future gasoline and energy prices is to “hedge” by buying stock in energy companies that will benefit from higher prices. I take the amount of money I spend on gasoline per month and invest that same amount in energy stock in a non-IRA account. For instance, if I spend $150 on gasoline (I drive a lot as a dog trainer), then I also buy about $150 in stocks in Occidental Petroleum Corporation or ExxonMobil.

These energy stocks have been beaten up over the past few years.  They are cheaper, relative to the broader stock environment, than ever.  I don’t have too much risk in buying these stocks because they are heavily discounted. If I’m wrong and oil and natural gas prices don’t go up then I own some stocks that probably stayed about the same. If, however, I am right then the stock prices of these companies will go up with energy prices.

Why do I buy those stocks? Because they have the largest holdings of energy reserves. If I have 100 barrels of oil in the ground and the price goes from $50 per barrel to $75 per barrel, then the value of those reserves goes up as well.

I buy these stocks using an online trading account.  I use E-Trade, but none of them charge any sort of fees to buy or sell stocks anymore, so any online trading account will do.  I do not set the account up as an IRA or use any sort of “retirement” account to buy these stocks.  That would limit my ability to sell the stocks without penalty before retirement age.  Instead, I use a standard “brokerage account” to buy and sell these stocks.  That way, when gas prices are high (and the stock price is high), I can sell the stocks to buy gasoline.

I am not buying the stocks to invest. I am buying them as a hedge against rising energy prices. If energy prices go up, the stock will go up too. Let’s say I buy $150 in stock today and energy prices go up 50% in three years.  I feel like the stock price will go up 50% as well. So, I can sell the stock that is then worth $225 to buy $225 in gasoline.

Living in the Real World

As homesteaders, we try to live in the “real world” where a dollar is a dollar, work is work, and we take care of ourselves. When external factors upend our ability to do that, it’s not good!  I am always trying to plan ahead whether that has to do with climate change, energy, healthcare costs, or simply getting around when I’m 70.

I enjoy preparing for the future in whatever way I can. Every new building I build on my homestead, for instance, is wheelchair friendly because one day I may be in a wheelchair or using a walker. I would also like to protect myself—to the extent I can—against rising energy prices.

If I’m wrong then I have solar panels installed, a more energy-efficient homestead, and thousands of dollars in energy-company stocks. If I’m right, then those same things might be the reason I am able to afford electricity and gas five years from now.

To me, it’s worth the investment.

Comments

  1. Thank you for sharing this . It makes sense to me.
    When my dad bought his land many years ago he decided to become self-sufficient as possible. I am living in apartment but I still enjoy reading your blog.

  2. The coronoavirus has caused a collapse in energy use. Saudi Arabia and Russia have caused a collapse in the oil price. These are new developments that will ACCELERATE the collapse of Shale Oil production in the United States. Right now we are awash in oil with no place to put it. That will be true for a while. But, once the economy comes back (whenever that is) and people start driving again oil prices are going to skyrocket, in my opinion.

    70% of U.S. oil is used for Transportation. Right now no one is driving or flying and trucking is very low. Once people start driving and flying again oil use will go back to nearly where it was. But the Fracking industry will be crippled. 62% of U.S. oil came from fracking last year. 67% of U.S. natural gas came from fracking in 2019. 35% of U.S. electricity generation came from natural gas last year. The fracking industry has been crippled. That means when things get back to “normal” oil prices will go up and electricity prices will go up as well. 2019, in my opinion, represents the high water mark of U.S. oil production (Peak Oil). From here on out production will decline. Demand will decline as well from both the recession and due to demographic shifts… but the price will rise.

    I just wanted to update my thoughts based on the changing conditions. I thought the Fracking Fields would take a year or two before they cratered. It is happening now. There will be a delay in prices rising due to the recession. The good news is that you can buy solar cheap or use stimulus money to buy a high efficiency air conditioner or car before the prices to up.

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