Thursday, July 03, 2008

How Long Before This Bubble Pops?

Alan Greenspan inflated a real estate bubble to ward off the effects of the popping of the stock bubble. Now Bernanke has inflated a commodity bubble. Don't think so? Read this:

Trevor Walczak is concerned about the environmental impact of natural-gas companies drilling on his land in eastern Pennsylvania, but $342,000 in this economy was too good to pass up.

"This type of windfall gives everybody a great opportunity for the future -- it's multigenerational," says Mr. Walczak, who recently sold lease rights on 163 acres for $2,100 an acre to Ohio-based North Coast Energy Inc.. "Just the ability to become debt-free is a huge leap for somebody."

The 31-year-old forester, whose family owns a sawmill, thinks worries about how drilling will affect water supplies are overblown. He plans to use his windfall to invest in a quarry.

Thousands of other Pennsylvanians are making a similar calculation. In the current economic squeeze, financial opportunity is outweighing environmental issues for people swept up in a land grab by energy companies targeting gas reserves thousands of feet beneath people's properties.

Companies eager to secure rights to drill into a deep stratum of shale known as the Marcellus deposit are paying as much as $2,500 an acre, or more, in some parts of the state, up from $25 an acre a year and a half ago, for five-year leases. Meanwhile, royalty rates, which are paid once production starts and could eventually lead to far greater income for mineral-rights owners, have risen to 18% of production revenue in some cases, compared with the state-mandated minimum of 12.5%.

These leases have gone from $25 per acre to $2500? The gas companies probably could have bought the land for that price not that long ago. That my friends is a bubble. The best thing I can say about this one is that at least the money seems to be going to sensible people. I wonder how long they'll stay that way?

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