The lowdown on fracking

Investors could make big money from fracking - but it’s not a sure thing. There are risks. Ed Bowsher explains what fracking is, and looks at the pros and cons from an investment perspective.

Fracking is all the rage at the moment, and its possible that investors will make big money from it. But its not a sure thing - there are risks here.

In this video, Ed Bowsher explains what fracking is, and also looks at the pros and cons from an investment perspective.

Transcript

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Hi, in this video, I'm going to give you the lowdown on fracking'. And I'm going to look at what it means to US investors and investors in the UK.

So, you probably know what fracking is. But here's just a really quick summary:

Fracking is an old technology that's been improved in the last few years. It now means that we can extract oil and gas in commercial quantities from shale rock. That's rock where, previously, we have not been able to get the energy out. Fracking uses a lot of water to make it commercially viable to extract the energy.

Now in the US, the fracking revolution has begun, and energy is being extracted from shale rock. That's been great news for the US economy. It's meant cheaper energy and it's been really good news for manufacturers.

We've seen a new phenomenon called re-shoring', where some US manufacturing companies are bringing manufacturing back from places like China and India to the US, partly because with technology, they don't need that much labour anymore, but partly because energy is cheaper.

The other big positive for the US is that the balance of payments is improving. In other words, the US is importing less oil. That's good news, and it should lead to a stronger dollar. So, if you want to benefit from this shale energy revolution, potentially, you might invest in some US manufacturers.

You might even take a position in the dollar, but I would be careful. There are a lot of other issues to consider. Don't pile all your money straight into the US, because no doubt about it, the US economic revival is partly down to the shale oil and gas revolution.

So, what about the UK? Well, there's no doubt there's plenty of shale oil and gas beneath the UK. And one recent report suggested that there's enough extractable shale gas beneath 11 counties in the midlands and the north of England, that it's equivalent to 50 years of natural gas supply for the UK. That's an amazing figure. If we really can get all that gas out, it will make a big difference to the UK economy.

But there are two risks here.

The first risk is that it's still early days. We're still in a maybe' situation. We don't know for sure that we can extract this gas in a commercially viable manner. There needs to be a lot more drilling, and a lot more exploration until we really know how much energy we can bring out in a commercially viable way.

The second risk is the environment. I'm not going to assess the environmental impact of shale energy. I haven't got time in this video. All I am saying is that a future government might say, "Yes, there's lots of gas we can get out in a commercially viable manner. But the environmental cost is too high. So we're still not going to do it."

You might say that risk is negligible, you might say that risk is high - but you need to bear it in mind. I think it's a really important point here. There is plenty of risk if you invest in UK shale energy. But equally, the potential reward is huge. So right now, in February 2014 as I make this video, I think the risk-reward balance is still in favour of investors. And if you want to invest in the UK shale energy revolution, there are several companies that are well placed to benefit. And you can find out more about these companies in MoneyWeek.

If you're a subscriber, just go intoour web archiveand you can read some of those old articles where we give you some tips. And if you're not a subscriber,sign up for a free trialand the whole archive is there available to you.

So, that's a really quick overview on the fracking revolution. But I hope you found it helpful. And we'll be back with another video very soon. And if you want more information on fracking, we've also gota free report for you.

Ed has been a private investor since the mid-90s and has worked as a financial journalist since 2000. He's been employed by several investment websites including Citywire, breakingviews and The Motley Fool, where he was UK editor.

 

Ed mainly invests in technology shares, pharmaceuticals and smaller companies. He's also a big fan of investment trusts.

 

Away from work, Ed is a keen theatre goer and loves all things Canadian.

 

Follow Ed on Twitter or Google+.