My neighborhood gas stations are now advertising gasoline for less than $3 per gallon, something we haven’t seen in many months. In California, drivers are celebrating the fact that gas is now in the $3s instead of the $5s.

Gas prices should continue to decrease, too. And areas with low gasoline taxes could see prices as low as $2.50 per gallon before the New Year.

So what’s causing the price drop?

[ad#Google Adsense 336×280-IA]A few things are driving the decline.

Including fewer problems at refineries, less demand thanks in part to the winter driving season, more efficient cars, lack of bad news coming out of the Middle East – and, of course, growing U.S. oil production.

Indeed, oil inventories in the United States are up sharply as domestic production continues to surge.

So much so, that the International Energy Agency predicts that the United States will surpass both Saudi Arabia and Russia as the top oil producer in the world by 2015.

But is this growth sustainable?

And, more importantly, what are the investment implications?

Oil’s Clock is Ticking

Unless new sources of oil are found, oil production in the United States will likely peak in the next decade.

U.S. production will likely mirror a bell curve, with the peak occurring around 2020, after which production will plateau for a while and then decline. (Of course, new finds could improve the situation. But that’s where we’re headed right now.)

So what does that mean for investors?

Simple. The shale plays that are so popular today will be great trading vehicles for at least another five to seven years – but only if oil prices hold up.

And that’s a big if…

You see, it’s been our view for some time that oil prices are going to be the determining factor when it comes to the success of shale plays. And as we’ve seen, the price of crude oil has dropped by $15 per barrel in the past couple of months.

Shale oil stocks have reacted negatively to this plunge, as they should.

The question is whether the price of crude will fall even further – and how that will affect these companies.

Stick With Shale Companies That Got in Early

Logic dictates that if the United States hasn’t reached peak production, prices do, indeed, have further to fall.

Without global tension to add a risk premium to prices – and with moderate global growth in the cards for the next couple of years – prices of crude oil could fall to the $70s.

Such a move would devastate profits for the shale players, as their expenses are much higher than for drillers in the Gulf of Mexico or even Alaska.

Bottom line: Shale oil is here to stay, but its profitability depends on two things: higher economic growth and better technology to reduce production costs.

The current trend for production is very favorable, but the trend for prices is going in the wrong direction.

That could spell disaster for many shale oil players that have paid huge premiums for land that has yet to produce a drop of oil.

Ultimately, if you’re looking to profit from the boom in shale, stick with companies like Pioneer Natural Resources (PXD) and Continental Resources (CLR). They were two of the early entrants in the boom and amassed massive property holdings – at much lower prices.

And “the chase” continues,

Karim Rahemtulla

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Source: Oil & Energy Daily