Something didn't sit right with me this morning. The frustrating part, however, was that I couldn't pinpoint the reason. Fortunately for me, the bumper-to-bumper traffic on my way to work gave me the time to figure out what it was. Yet it wasn't until I pulled out of a gas station about a block from work that it hit me.
There was a recurring phrase I heard at least five times this morning while flipping through the various morning news shows. As one of the analysts put it, "We're coming up to the end of cheap oil."
At first, the idea was pretty reasonable. After all, oil prices rose approximately 57% in the past year. If any of you, dear readers, can remember the cost of a barrel of oil at this time last January, it was under $50. Considering that oil has been steadily trading over $90 a barrel for the last few weeks, I can understand how they'd think that way.
But I'll let you in on a little secret . . .
The age of cheap oil is already gone.
There is a catch, though. When I'm talking about cheap oil, I'm referring to the oil prices that we've been used to. Was oil cheap early in 2007 when it was at $50 a barrel? Absolutely. How about at $70 a barrel?
Definitely.
You see, peak oil is changing the way we look at oil prices.
Who knows what we'll be hearing next January if oil prices experience the same surge as in 2007? Perhaps they'll acknowledge that cheap oil as we used to know it gone forever.
The Inevitability of Peak Oil
I want to bring some of you up to speed before going any further. Judging from the emails I've been getting from my newer readers, their concept of peak oil has been slightly askew. I don't blame them, however, because if I were to ask a random person about peak oil, nine times out of ten I'd get this answer: "There's so much oil left in the ground, peak oil is nothing but a load of BS."
My loyal readers know that I've talked a lot about peaking oil production. As you know (I can only hope), oil is a finite resource. The question isn't whether oil production will peak, but rather when that peak will occur. Peak oil is all about the maximum flow rates we can achieve. As one of my colleagues put it, "Don't look at the amount of barrels left, count the barrels per day."
When peak oil is reached, it won't matter how much is left in the ground, because we can only use as much as we can extract. In other words, the easy-to-get oil is running out. Sources that were once considered unconventional, such as deepwater reserves, are now considered conventional.
Today, we're drilling further and deeper than ever before. And those efforts are barely keeping up with decline rates.
Now, I know I've told you this a dozen times, but the truth is that our addiction to oil is growing out of control. The world's desperate need for increased production is going to cause trillions of dollars to be invested in the oil industry.
Earlier in the week, I mentioned that there were numerous opportunities for investors. Specifically, one of the areas with the most potential is in oil service companies.
Investing in Peak Oil
While many energy companies performed admirably during 2007, one of the most promising sectors is in oil field services.
In the past, I've discussed companies like Transocean (NYSE: RIG). This is a perfect example of how a service company can perform. RIG is an offshore contract drilling company that surged in 2007.
But they aren't the only ones. Schlumberger (NYSE: SLB) is one of the largest services companies in the world. As you can see below, they've also had an excellent year . . .
Granted, we're looking at two of the leaders in the service area, both with high share prices, but that doesn't mean these guys are the only players in the field. As always, I would suggest you do your own due diligence when looking for the right company.
Until next time,
Keith Kohl
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