The New Hot Thing: Shale Gas

Everyone is bulging in their pants talking about shale gas (at least that the idea I get while cruising the Interscape.) But it's not just those blogging on the Interbutts or politicians giving sound bites, there is real action going on.

The big news is that companies such as ConocoPhillips and Marathon Oil have bought leases to explore potential new gas sources in Poland. The natural gas exists in beds of shale, not just in a porous material. The rock is fractured to let the gas escape and be extracted by a well. It was, up until recently, not very economical to extract gas this way; however, newer techniques, such as horizontal drilling, have led to an explosion of exploitation of shale gas reserves. Shale gas has been mined in the US for some time now, and it's looking to export the expertise to the rest of the world.

As the cost of oil climbs, natural gas is almost constantly getting cheaper. Europe has a ravenous appetite for natural gas, which it uses for heating. Europe is particularly at the mercy of Russia, which exports most of its gas that way through Ukraine. Every winter, it seems like, Ukraine and Russia play a game a chicken, where Russia threatens to shut off the gas (which it did in the winter of 2008-2009) unless Ukraine pays higher prices and stops stealing it for their own use. Countries in Central and Eastern Europe are particularly vulnerable to Ukraine and Russia's game over energy. States such as Bulgaria, Serbia, and Romania are usually the first feel the pinch when the valves close.

Since Russia can be a pretty big dick about it, Europe is constantly looking for new energy supplies. Pipelines through the Caucus Region and through Turkey are particularly prized. It would be even better if Europe could produce the gas themselves. In steps the USA with its massive energy companies who have been doing this thing for some time now. The companies are looking beyond US borders for even bigger prospects in places you might not think.

Poland will be the first to start seeing if it has what every sovereign state covets: a massive energy supply sitting under their pasty, white tushes. Ukraine, seeing that its neighbor is expecting a windfall right near the border, is positively euphoric about the possibility of finding one of their own. No more having to bicker with Russia about gas (or bicker as much, as these gas finds probably won't fulfill their needs.)

The whole thing is though, is that no one really knows if there is gas there and how much. Everyone knows that Poland has coal (coal and gas often go hand-in-hand) but coal is dirty, can be dangerous to mine, and isn't the moneymaker that gas can be. Natural gas is used in industry, for heating, used to generate electricity, is used pumped into oil wells to force the oil up, and can help enrich fertilizers. To be short, gas is gaining importance rapidly, and Poland could (or could not) become a player in the field.

It's Official: Buy Złoty!!!

With Greece still swirling around in the toilet, waiting for Germany to scoop them out and pat them down, the Euro is taking a moderate beating. Many economists see the depreciation of the Euro as a moderate-term event; meaning both the Dollar and the Zloty will be gaining ground against it in the immediate future. The US is expected to raise rates from the near-0% it has now before the ECB does, since the Euro Area has to deal with this new crisis. Poland already has higher rates than both the ECB (Euro Area) and the US, so it behooves one to to borrow from the ECB and invest in Poland. You borrow money for almost nothing, and get a higher return.

In a previous post, I commented how the weakness of the Zloty helped the Polish economy by making Polish goods and services cheaper compared to other countries. I also noted that it was a double-edged sword in that it make imports more expensive (it did: the prices rose by about 30%) especially for energy, namely, oil. Well, I have a two points to make concerning the Zloty's weakness.

I forgot to add that while the Zloty was weaker, making energy more expensive, energy prices themselves were falling rapidly. Oil dropped from $147/barrel to almost $30 faster than you could say "Well, fuck me!" So, while the Zloty was trading near 2 PLN to the $1 in mid-2008, it dropped to almost 3.50 PLN to the Dollar in early 2009, but also energy prices followed suit, taking care of the difference.

The second point, is based on Poland as a brand. Let's face it, Poland isn't exactly known for the quality of its products (Belvedere Vodka excluded, which is known as a premium vodka brand in the US.) Countries like China, India, and the Philippines aren't either, while countries like Switzerland, Germany, and Japan are. The point I'm trying to make is that people will buy Polish goods because they are cheap, not because they are expecting quality. People will buy Swiss and German goods (and pay a little extra) because they think they are getting a superior product, especially in the terms of quality. So, until Poland because a known for its high standard of quality, it should have every bit of help it needs to make its goods cheaper, i.e. a weak Zloty.

By the way, I'm looking forward to seeing how this all turns out. If I'm wrong, so what (barely anyone reads this anyway, and I'm sure even fewer actually take my advice to heart.)