Less Supply & Higher Demand Mean Ever Higher Oil Prices 

A bunch of bobble-heads and tongue-waggers are saying that the recent decline [in the price of crude oil] shows the top is in… [for] this year. Sheesh, gimme some of what they’re smokin’! Words: 1215

So says Sean Brodrick (www.UncommonWisdomDaily.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted and edited [...] below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Brodrick goes on to say:

The politicians in Washington tell us the economy is recovering. Well, maybe so … as long as you don’t need a job. The problems facing this country — in debt, energy, lost jobs, unbalanced budgets and more — continue to mount. In short, I think we’re headed for a head-on collision with hard times. Are you going to be ready? Words: 1386

So says Sean Brodrick (www.uncommonwisdom.com) in his original article.* Lorimer Wilson, editor of www.munKNEE.com, presents below further edited [..] excerpts from the article for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Brodrick goes on to say:

4 Economic Dark Clouds Are Gathering Over the Country:

1. Jobs Depression
Sure, sure, GDP is rising … on a tide of government spending. U.S. manufacturing is growing too, as long as you don’t mind that a growing slice of the parts used in “U.S.” manufacturing are made in China. Meanwhile, jobs are vanishing. Twenty-nine million Americans either can’t find jobs or can’t find full-time work. Do you think that’s going to improve as long as companies can ship American jobs overseas where someone will work for $3 a day? Heck, no. It’s going to get worse!

2. Budget Implosion
Yes, the national debt of the U.S. has doubled in less than eight years, but I’m sick of talking about the ballooning U.S. budget gap. For a different dose of awful, let’s talk about the states. Across America, states are running deep in the red, and together, face a shortfall of $156 billion in fiscal 2010, according to The Economic Policy Institute.

Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing severe funding crises, and they’re just the tip of the iceberg. The head of JPMorgan Chase, Jamie Diamond, says California’s $20 billion budget deficit is worse than anything facing Greece or other financially troubled countries in Europe. Since California is the world’s eighth-largest economy, that should set off alarm bells!

State budget deficits will likely be resolved with layoffs and budget cuts, which will hammer local economies and worsen the downward spiral.

3. Energy Crisis
After over 18 months of recession, world oil consumption is roaring back to its pre-crash peak. The International Energy Agency says oil demand will probably hit 86.5 million barrels a day this year. That is equal to a thousand barrels a second. The growth in demand isn’t in the U.S. — we’re using oil at 2005 levels. Instead, it’s the growth in China, India and other emerging markets that is driving global demand now.

Meanwhile, on the supply side, new oil discoveries peaked decades ago. Starting in 2011, we’ll see a drop of just over 4 million barrels per day from the fields that are currently producing about 85 million barrels a day. After 2014, world production will go into steeper and steeper decline.

4. The Road to Famine
World food demand is projected to increase 100% by 2050 due to a rapidly expanding population in countries such as China and India and yet, 963 million people, 14% of the world’s population, are already chronically hungry. Do you think you’re immune? The food on your dinner table travels an average 1,500 miles to get to your plate. Think again!

Stand Up and Fight Back
I could go on, but a whole list of all the problems facing us can seem overwhelming, and it’s probably too early for you to start drinking. I don’t think these problems will hit next week, but they are growing, and time is a luxury we cannot afford to waste. Here’s the good news: you don’t have to sit there like a lump and wait for bad news to smack you in the face. You can stand up and fight back! When it comes to finances you should be using these good times to get ready – and if you don’t think these are the good times, brother, you don’t want to know about the potential bad times!

4 Ideas to Beat The Crises and Protect Your Portfolio:

1. Move Your Money
Do you trust the big banks? I sure don’t… Their bad behavior was never punished, which increases the odds that the big banks are going to mess up big-time again. Do you think that Wall Street banks will get another bailout? I think that’s unlikely — the American people are downright furious! [As such] I don’t want my money in their banks when the manure hits the fan AGAIN… [and have] moved [my] money from a large, global bank to a couple of smaller, local credit unions and community banks. Community banks are typically more conservative about how they manage their money. I certainly don’t have to worry about them using my taxpayer dollars to hand out billion-dollar bonuses.

Bankrate.com [will tell] which banks in [your] area are the most financially secure… and you can google “Move Your Money” for more information on this movement. It’s not just individuals who are doing this. Cities as big as New York and Los Angeles are fed up and considering moving their money to local community banks as well.

2. Buy Gold While It’s Still Cheap
…if you think gold is pricey now … just you wait! I prefer to own physical gold for the long term, but you can always buy the SPDR Gold Trust (GLD) or ETFS Gold Trust (SGOL) if you’re just doing it for a trade.

3. Buy Gold Miners While They’re Still Cheap
You can play the coming rally with any gold ETF, but I think gold miners look cheaper right now. If you don’t like buying individual miners, consider the Market Vectors Gold Miners ETF (GDX) or one of the other funds or ETFs that holds a basket of miners.

Now, why buy gold miners if I think hard times are coming?
a) If the U.S. dollar slumps the way I think it will, stocks will probably head higher. That’s because they’re priced in dollars, so it takes more dollars to buy them.
b) In the Great Depression, when many stocks weren’t worth toilet paper, select gold miners did well. That’s because the price of gold did well, and they were real companies producing a real asset.

4. Ride The Market Megatrends
Not all things financial are headed down the tubes. The commodity supercycle is real and we’re seeing it play out as China, India and other emerging markets buy more and more metals, energy, and other commodities to feed their economic expansions. Commodities should continue to outperform going forward. While other sectors are headed down the tubes, commodities should continue to outperform going forward.

Meanwhile, America’s baby boomers are aging. They’re going to be looking for income, and with bonds paying piddly yields, they’ll probably load up on dividend-paying stocks and what are some stocks that pay some of the best dividends? Commodity stocks! Put those two trends together and you should have some stocks that will outperform the market, pay you nice dividends and potentially rack up solid price appreciation, too. You can find these stocks on your own. If you’re looking for dividends, as a rule of thumb, you want stocks that pay at least a 3% dividend. Just be careful, and be aware that when it comes to stocks that pay dividends, it can be hard to tell the turkeys from the eagles.

What am I doing? It all boils down to the Three P’s — Plan, Prepare and be Proactive. In other words, I’m trying to take an honest assessment of the problems facing the country and me personally. I’m preparing both physically and financially. (Are you?]

*http://www.uncommonwisdomdaily.com/4-tips-to-beat-the-next-crisis-8846 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. To view archives or subscribe, visit our site.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.

“Once economic growth recovers, it is likely we will return to the market conditions of 2008. The price of $140 per barrel oil was not an aberration; it was a warning.An oil crisis is coming that could prove devastating to future economic growth. Given the long lead times of 5-to-10 years from oil discovery to production, we need to act now to avert this outcome.” Words: 862

In further edited excerpts from a speech* delivered at the Money and Oil Conference in London in 2009, John Hess (with Joseph Dancy**), Chairman of Hess Corp., went on to say:***

“In the interest of creating good energy policy, let us establish the facts:

Fact No. 1: Hydrocarbons
85% of the world’s energy comes from hydrocarbons: 35% oil, 30% coal and 20% natural gas. While renewable energy will be needed and should be encouraged to meet future energy demand and contribute to reducing our carbon footprint, hydrocarbons will fuel the world’s economy for decades to come – and oil will continue to be at the forefront. Renewable energy does not have the scale, timeframe or economics to materially change this outcome.

Fact No. 2: Oil demand
Once the economy recovers, it is projected to increase by 1 million barrels per day each year. A key driver is world population, estimated to grow from 6.8 billion today to 9 billion by 2050, largely in the developing countries of the world. With a corresponding increase in living standards, hydrocarbon energy, led by oil, will be needed to support economic development.

The other driver of demand growth is transportation, which accounts for 50% of oil consumption. An interesting statistic to keep in mind: The U.S. has 1000 cars for every 1000 people; China has 10 cars per 1000. As China closes that gap, growth in oil demand will be relentless.

Fact. No. 3: Oil supply
We are not running out of oil. We have produced 1 trillion barrels so far and estimates are that we have about 3 trillion barrels remaining to recover – 2 trillion barrels of conventional resources and 1 trillion barrels unconventional, such as tar sands and heavy oil. The issue is not our endowment of oil resources. It is the world’s production capacity. Resource additions from exploration last replaced annual production in 1987. Part of the challenge going forward is that the easiest oil to access has been discovered. Costs are increasing for new barrels as producers explore frontiers such as the deepwater Gulf of Mexico and Brazil, where wells can be drilled in . . .

Oil field declines are estimated at more than 5 percent per year. That means we have to add at least 4 million barrels per day each year just to keep production flat. When you add this number to the 1 million barrels per day required to meet demand growth, we need an extra 5 million barrels per day each year going forward. . .

Given these facts, we need to communicate the following message:

(1) Hydrocarbons are here to stay.

(2) Oil demand growth will be unrelenting, increasing 1 million barrels per day each year.

(3) We are not running out of oil but growth of production capacity over the next several years will fall short of the incremental 5 million barrels per day each year that we will need to meet demand.

(4) We will ultimately be at risk of supply rationing demand through skyrocketing prices that will threaten economic stability and prosperity. If we do not act now, we will have a devastating oil crisis in the next 5-to-10 years.”

Joseph Dancy, Adjunct Professor, SMU School of Law, agrees** with Hess’ premise stating that “The trends in long term supply and long term demand growth in emerging economies raise concerns about the pricing and availability of sufficient crude oil supplies in the future. Merrill Lynch*** have raised their 2010 crude oil price forecast to $85 per barrel from $75 a barrel. They see global growth above 4% versus a decline in economic growth in 2009. Merrill expects demand for crude oil to increase by 2 million barrels per day to roughly 86.9 million barrels per day.

Energy analyst Neil McMahon of Sanford Bernstein Co. forecasts $100 a barrel prices within the next 18 months, then generally moving up from there. From an investment standpoint they recommend finding firms that are leveraged to oil prices, can grow production, and are flexible enough to find new fields.

The profile of firms that can meet the Sanford Bernstein benchmarks mean that they are mostly recommending small producers, with high beta, which should outperform in this environment for investors looking for growth. Of course, investor strategy depends on an investors risk tolerance and objectives. Larger energy firms may perform well but smaller firms should perform much better. Many larger firms are having difficulties increasing production.

Global consumption and production has been roughly 85-87 million barrels per day until the recent recession—when in fell back to roughly the 84 million barrel per day level. Goldman Sachs also raised their forecast recently for reasons noted above. The International Energy Agency have increased global demand estimates to 86.2 million barrels per day in 2010, up from estimated average demand in 2009 of 84.9 million barrels per day.

The long term trends in the energy sector favor the bulls.”

*http://www.napipelines.com/news/2009/articles/11nov/5.html
**http://www.financialsense.com/fsu/editorials/dancy/2009/1201.html
***http://www.reuters.com/article/idUSTRE5AC1QH20091113

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

The key point of Peak Oil isn’t about how much oil there is in the ground, or reserves, but the potential imbalance in extractive flows, or how much you can bring out of the ground at any one time. As a consequence, the world is facing falling production that will be hard to replace in the foreseeable future. Words: 2032

In further edited excerpts from the original article* Cam Hui (www.qwestfunds.com) goes on to say:

New Discoveries Insufficient to Avoid Peak Oil
To illustrate the concept of flows versus reserves, imagine that you had $1 billion in the bank but you could only take out $1 a year. You have lots of wealth (reserves), but you are short on usable cash (or extractive) flows. The International Energy Agency’s (EIA) 2008 outlook estimates that the world needs to replace production equivalent to six Saudi Arabias by 2030. Even if we were to assume that oil consumption stays flat to 2030, we would then need to replace four Saudi Arabias of production (instead of six). While these new discoveries do help alleviate future potential shortages, they are, to excuse the pun, a drop in the bucket in efforts to offset future production declines.

The Theory Behind Peak Oil
The theory behind what is commonly known as “Peak Oil” is that global oil production capacity cannot meet rising global demand. In fact, production capacity is expected to peak and begin to fall in the near future. When that happens, oil shortages will develop. The world is not running out of oil, but running into the Malthusian limits of extraction and production capacity.

An important assumption behind Peak Oil is that we are about to use up half of all of the extractable oil that there is in the ground. Once we hit that peak, production starts to fall. Meanwhile, world demand continues to rise, driven by industrialization and rising affluence in the developing world. When rising demand and falling supply meet, you get an energy shortage and rising prices. The realization that there are limits to production growth would highlight to investors the scarcity of oil as an energy source, as well as create constraints on world growth.

A Profile of Falling Oil Production
You turn on the taps and get a big ramp up in production, which is followed by a plateau and eventually by a slow decline until it is no longer profitable to keep the field running. What many analysts have done is aggregate the data for all oil fields around the world and create a global cumulative oil production profile. The depletion rates come to 4-6% when you come to the down slope, and the figures are corroborated by various sources like the IEA. That means a minimum of three million barrels of daily output is disappearing a year due to old age. In the meantime, announced finds that are due to come on stream can’t keep pace with lost production.

Putting Three Million Barrels a Day into Perspective
To understand what three million barrels a day really mean, the oil industry has gotten very excited about big finds such as Atlantis (Gulf of Mexico) and Plutonio (Angola). However such fields are only expected to produce 220,000-240,000 barrels per day. For another perspective, consider that the mammoth Ghawar field in Saudi Arabia produces 5 million barrels per day. We need six Saudi Arabias… Even if we assumed flat demand growth to 2030, we need to replace production equivalent to four Saudi Arabias.

When global oil production peaks or when the investing public gets a whiff of the prospect of a production peak, the markets will panic and energy prices will skyrocket. So for investors the question is “when is the peak?” The IEA estimates that the peak would be in 2020 under certain optimistic assumptions. Fatih Birol, chief economist of the IEA, stated a year ago:

“In terms of non-Opec we are expecting that in three, four years’ time the production of conventional oil will come to a plateau, and start to decline. In terms of the global picture, assuming that Opec will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well, which is, of course, not good news from a global oil-supply point of view.”

Wow! Non-Opec production is forecast to peak in three to four years time (2012). Peak in world production by 2020, but only if Opec (massively) invests in its infrastructure in a timely manner. The world is currently gripped by a global recession. With oil well off its $147 high and prices volatile, who is willing to invest in significant new capacity under these conditions? The answer also depends on your definition of “oil”. Commonly cited statistics lump oil output with other liquids (condensates and natural gas liquids). As Qwest Investment Management president Maurice Levesque pointed out we may have seen the peak in crude oil production in 2005.

The Politics of Oil
The IEA forecast is dependent on a lot of things going right.
1. there has to be enough large discoveries and sufficient capital invested to raise output.
2. that demand and supply are market driven and supply is not affected by political considerations.

In reference to the aforementioned, if and when the public believes that a global production peak is around the corner, there will be tremendous pressures for resource nationalism. Oil exporting countries will be tempted to enact legislation “to keep the oil for ourselves”, or to use oil as a weapon. The blogger Fabius Maximus calls this process “political peaking”. Remember Canada’s National Energy Program in the early 1980s? That was an example of political peaking, albeit a few decades early.

Today, we are seeing another example of political peaking and resource nationalism in Brazil, where legislation is being enacted to “include additional measures to give Petrobras the upper hand in future rounds of bidding for the deep-sea deposits”. For an example of the use of energy for geopolitical gain, consider what Russia did with gas supplies to the Ukraine and Europe in January 2006. The dispute flared up again in January 2009. Both incidents not only affected natural gas supplies to the Ukraine, but curtailed supplies to the EU as well. Now think about what Russia might do if there were widespread concerns about Peak Oil. Moving to the Middle East, what might a new government’s policy be should the House of Saud fall?

Industrialization = More Energy Demand
Energy demand is being driven inexorably higher by growth in the developing world. As countries industrialize and become more affluent, higher living standards are contributing to increased energy consumption. In addition, high energy consumer appliances have become cheaper and more readily available. Many of the developed world’s lifestyle advantages are now within reach of more and more people in the developing world.

The Energy Information Administration (EIA) of the US Department of Energy’s 2009 outlook shows that most of the demand increase is coming from non-OECD (developing) countries. In fact, 63% of the projected demand increase is coming from the BRIC (Brazil, Russia, India and China) countries. Most of the remaining demand growth is coming from other non-OECD, or developing, countries.

What About Alternative Energy?
The Obama Administration has made it clear it wants to encourage the development of alternative and renewable energy. Will a migration to alternative energy be able to save us from impending energy shortages? Frankly, you need oil to get from A to B. There aren’t many good alternatives to petroleum based fuels for transportation. The last time I looked there weren’t any solar or wind-powered cars, electric ships or nuclear airplanes in production or on the drawing board.

Adoption times for new technologies are also an issue. Robert Hirsch’s best case analysis of how long a Peak Oil mitigation program might take finds that even after a 20-year “crash program” an aggregate output increase of about 35 million barrels of oil equivalent a day. That figure is roughly equal to the production of four Saudi Arabias, which would be not enough to alleviate shortages in the IEA’s forecast to 2030.

What About all the Big Discoveries?
There has been a flurry of large oil finds lately. Won’t they change the outlook? BP announced a “giant” discovery at its Gulf of Mexico Tiber field. Iran also announced some large finds over the summer. These headlines are a ray of sunshine after years of gloom about diminishing reserves. To understand the impact of the recent discoveries, let’s go beyond the headlines and look at the numbers.

Analyzing BP’s Gulf of Mexico Discovery
BP did not release an estimate of the size of the field, but major integrated companies do not use the term “giant discovery” lightly. It is said that BP hopes that Tiber will be on par with its crown jewel, the Thunder Horse development. Thunder Horse produces about 300,000 barrels of oil equivalent per day, which is about one-half of Alaska’s North Slope daily output. Even after a 20-year “crash program” to mitigate Peak Oil, Hirsch projects an aggregate increase equivalent to about four Saudi Arabias, which would not be enough to alleviate shortages in the IEA’s base case scenario forecast to 2030.

Iran: Technology, Capital and Politics
The Iranian finds are problematical in other ways. While the new discoveries affirm Iran’s position as a major oil supplier for decades to come, its infrastructure is aging, its technology lagging and the country has demonstrated a suspicion of foreign investors in its petroleum industry. Consequently, the country’s oil production capacity has remained flat despite a number of new discoveries in the past decade. The Iranian oil ministry spends about $3 billion a year just to maintain
production but they are currently having problems sustaining their current output because of a lack of technology. Given the size of the projects, significant capital and technology are needed to exploit the new discoveries. Without foreign involvement, production increases are highly unlikely.

Then there is the geopolitical dimension to development. Iran has yet to find an investor for its giant Azadegan field, which contains an astounding 26 billion barrels of oil equivalent. During the summer, a consortium of Japanese companies backed off a $2 billion contract with the Iranian oil ministry under US pressure. Iran’s infrastructure is aging and the country can’t get the capital to upgrade its technology. Iran’s oil production capacity has remained flat despite new discoveries in the past decade.

Peak Oil = Peak in Flows
There are several points to keep in mind about threat posed by Peak Oil:

 It’s about how much you can take out (flows), not how much you have (reserves); and the world is running short of flows.

 The IEA forecasts that the world needs to replace production equal to six Saudi Arabias by 2030. While these new discoveries are a welcome respite from the threat of an imminent collapse in oil production, these finds are not game-changers in big picture terms.

Today, the world is gripped by the Great Recession, which serves as a temporary reprieve as it has the effect of dampening demand growth. Global demand should begin its inexorable rise again as soon as economic recovery takes hold.

A century ago the world migrated from coal to petroleum as an energy source. Hopefully it can smoothly transition to new energy sources in a way that does not significantly disrupt the global economy. I expect that the transition period to be extremely bumpy.

The imbalance between oil demand and supply is likely to result in a decade long upward trajectory in energy prices, marked by volatility. The world is going to be running short of oil production in the not too distant future and these new discoveries don’t change that reality.

*http://www.qwestfunds.com/publications/newsletters_pdf/newsletter_october_2009.pdf

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.