The Oncoming Oil Crisis in 2008

I'll admit it's hard to be optimistic about the oil markets, but in true form, the Energy Information Administration (EIA) was able to do so last week.

Before I start berating the U.S. agency for its rosy predictions, let's take a quick look at what they're expecting over the next two years. The EIA has always taken a cheery approach in its oil forecasts, so it wasn't a surprise to see some wishful thinking on their part.

In a nutshell, the EIA is expecting oil markets to remain tight for the rest of 2008 before easing in 2009.

The reason?

Well, they're offering several specific reasons for this:

• World oil consumption in 2008 will continue to grow faster than non-OPEC supply.

• This leaves OPEC production and inventories to offset the higher oil prices.

• Once 2009 comes around, non-OPEC production is expected to increase, alleviating some of the pressure on the markets.

• The EIA has projected the world's surplus production capacity to more than double by the end of 2009.

Like I just said, there's a lot of wishful thinking on the EIA's part. If oil has another year like 2007, then it will cost us well over the $150 a barrel.

This may not come as a shock to my readers, but I don't have much faith in the oil markets easing. Not one bit. I'd rather not get into a heated debate today over past shenanigans on OPEC's part. That's a rant I'll save until next time. Personally, the only OPEC country I feel has a chance of significantly raising output is Saudi Arabia.

Last week, Venezuela announced that OPEC doesn't have to increase production because oil over $100 a barrel is, "a fair price." We've heard this dozens of times from the oil cartel. First they were comfortable with $50 a barrel. When oil surpassed $70 a barrel OPEC refused to turn on the taps. Why should $100 a barrel be any different?

At what point will we ask, "Does OPEC even have the ability to turn on the taps?"

Non-OPEC production is much different. The EIA is projecting U.S. oil production to increase by 6.9% (approximately 350,000 barrels per day) in 2009. Okay, you can take a minute and laugh with me.

Our production peaked back in the 1970's and has been declining ever since. To put that into perspective, we're producing about as much oil as we did in 1947!

According to the EIA's own data, crude oil production from U.S. fields hasn't been performing too well since peaking. Within the last twenty years, care to guess how many times we've managed to raise production over the previous year?

Once.

That's it, back in 1991.

Please pardon me if I don't jump up and down when the EIA expects our production to rise by 6.9% in two years.

As to the question of why oil prices were so high in 2007, the EIA offers several reasons. Not only do I agree with them (I would add a few of my own), but I feel these could also play a considerable role in pushing oil prices even higher over the next few years:

• Strong world economic growth, specifically from China and India.

• Moderate non-OPEC production growth.

• OPEC's inability to raise production capacity.

• Widening gap between global oil supply and demand.

• Geopolitical and weather-related volatility.

Now, assuming you don't read my column for your health, as investors we have a multitude of ways to invest in the oil crisis.

Value Investing

Today, investors have so many options to play the energy markets it's often hard to keep count. Right now, I like the oil service companies the best.

Here's why . . .

I firmly believe that our world is so addicted to oil that we're going to stop at nothing to get it. And if there's one thing everyone has in common, whether it's countries that have booted out all foreign companies (Russia, Venezuela) or small exploration and production companies struggling to keep afloat, it is a desperate need for these service companies.

That's why the world is going to spend an unprecedented amount of money investing in its oil infrastructure over the next decade.

On Thursday, I'll let my readers in on a few of the oil service companies I've been looking at for the past year, so stay tuned.

Until next time,

Keith Kohl

www.energyandcapital.com

P.S. Look, we've been preparing for this energy crisis for years and have already made some substantial gains. If you're interested in joining the rest of my Energy and Capital readers, please feel free to check out The $20 Trillion Report here.

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I hate oil sands!!!

This is a great article and I think it's 100% correct. I also think people don't understand the relationship with oil and water. I follow the Saudi Aramco Rig count. In the past several years they've been renting as many jackup rigs they can get their hands on.....yet production is about the same. It seems to me they've punched many more holes in the ground to get the same amount of oil. Saudi Production requires massive amounts of sea water.....I have a friend working on a water project dealing with 40" 50" and 60" water pipeline moving massive amounts of sea water down south from around Dammam to where? I am not sure, maybe to support Abqaiq and maybe some north to support Qatif? But I know this.....I don't know of any new spending on pump stations and GOSP. There is a limited capacity of it's GOSP (Gas and Oil Separation Plants), and it's maximum throughput of it's pipelines. Aramco's problem is not oil it's water and the battle to keep the reservoir pressure above bubble point is getting very intense. Aramco is investing in moving larger volumes of water from point A to point B......but it seems to me it's for the GOSP they already have in place. If you try and build a new GOSP today....maybe it will cost one billion dollars and take 7 to 8 years. So the GOSP capacity is shutin and can deal with 8,9 million barrels per day and up to 11.5 barrels per day but not more than that over a long period of time....more than that would require more shutdown projects to replace flanges, pipes, valves, pumps and motors. It's my opinion if Aramco is punching more holes in the ground and getting the same amount of oil and they are not investing in new GOSP to support increased oil production in the future means that they see their is no need to spend the money on increased GOSP capacity and the hand writing is on the wall. We are in deep doo-doo. Aramco Renick, Peachtree City, Ga.

i can see some truth in this article.(other countries) but, i have been in the oilfiled for a long time, when i started working in the oilfield, oil was 8 to 10 dollars a barrel. i'm not sure about other countries but in western oklahoma and the texas pandhandle we our producing more oil than we ever have.

World demand for petroleum may slacken as the world economies slow down. China and India may slow their RATE of demand increase, as world economies slacken. The price - earnings ratios of petroleum companies may decline even as such companies pump more petroleum out of the ground. The old Securities Research Corp charts from the late 1920's until the 1950's showed IBM earnings and dividends increasing every year from 1932 yet at the same time the share price declined every year, year over year. Increasing sales and earnings every year are no guarantee of share price increases, as the entire world economy re-prices price - earnings ratios lower year over year. Notice the stock market crash of 1937. Dividends of Homestake and Dome every year exceeded the 1932 NYSE share price for each company. Increased oil and gas production will come in from new discoveries offshore Brasil and from the Chevron - Devon project in the Gulf of Mexico. Increasing costs of production and Alberta increasing royalty demands will make oil sands projects less economic and less fruitful.

Can it possibly be true that EIA is predicting as you indicate in 4th bullet of jan 15 article "world's capacity to double by end of 2009"? Arew we talking production capacity of 85 million x2?

ron turner

government is "for the people". OPEC has finite supply of oil and its responsibility is to get as high a price as possible for it. what possible motivation would they have in increasing production and lowering their income?

BRIEF, SHARP, INTELLIGENT ARTICLE ON THE FUTURE OF OIL. GOOD WORK. YOU GET FIVE STARS FROM ME.