One of Five Places Left for Oil

Humans are fundamentally no different than yeast.
We will consume all our resources and die in our own excrement, given the opportunity.

— “Bytesmiths,” from a message board

Time to Buy Oil

Here’s a nice-looking chart provided by the hard-working men and women of our federal government:

It shows the Cushing, Oklahoma contract for oil, which dropped $0.80 today to $86.15 a barrel.

Cushing is landlocked and swamped with oil from the oil sands, so its price is below what the world pays. Brent North Sea oil is the world standard and is now going for $110.65 a barrel.

So while gold has been named the “Investment of the Decade” and has gone up some 600% since 1998, oil has gone up roughly the same — or 616% — even after including the recent selloff.

Parabolic?

Both of these spikes coincide with the money-printing program started by Fed Chief Alan Greenspan to fend off the Long-Term Capital debacle as well as the Asian Contagion, an emerging market banking/currency crisis.

This printing goes on to this day, but it’s more than just inflation that’s pushing oil higher…

A Great Call

There is another reason oil is moving up in price.

Perhaps surprisingly, some people saw it coming fourteen years ago.

Here is a Forbes interview of Franco Bernab, CEO of Italian oil company ENISpA:

“NOT THIS YEAR, nor the next, but maybe as soon as five years hence, oil prices will start to rise,” says Franco Bernab. Well before 2010, he believes, the world will be vulnerable to 1970s-style oil shocks.

Bernab said, “There is a great deal of complacency among politicians and economists that the oil problem is over. But despite today’s low prices, in the long term we will be back to a high-price scenario in the oil sector.”

“It sounds unlikely, at a time when crude prices have sagged below $15 a barrel. In real inflation-adjusted terms, that’s not much above the price level just before OPEC sandbagged the world with $30 oil in the mid-1970s.”

That’s hitting a prediction on the head.

Bernab went on to detail the much-written-about peak energy scenario we at Energy and Capital have been talking about for years. And he was absolutely correct.

It isn’t “speculators” or evil “Big Oil” that’s causing high energy prices; it’s the fact that we are running out of quality, low-cost sources.

Global Downgrade

Brent is still over $100 a barrel despite the fact that the IMF recently warned that the global economy has entered “a dangerous new phase,” and cut global GDP back to 4.0% for 2011 and 2012.

The IMF is always the last group on the bandwagon.

The global recession has been priced in for six months. If you are paying $3.50 for gasoline today — after driving season — what will you pay if the economy gets going again?

There are a growing number of people who believe the root cause of our economic problems has to do with the increased percentage of income we spend on energy. Ten years ago, the average North American spent 5% of income on energy. Today the average is closer to 10%.

The more individuals spend on gasoline, or companies spend on making and transporting product, the less money that leaves for growth.

In an over-leveraged system, this results in compression — not expansion.

One way to benefit from this is to buy those companies that are finding oil. Of the five places left in the world to find oil, East Africa is getting hot. I’ve been talking about the prospects in Kenya since I went there and put boots on the ground a few months ago.

Total Buys

Today, French major Total (NYSE: TOT) announced it was buying a number of prospects offshore Kenya. The company bought 40% interest in five offshore exploration blocks in the Lamu Basin.

Total will acquire:

• a 20% stake from Anadarko Kenya Company, which will continue to be the operator with a 50% interest in the permits

• a 5% stake from Cove Energy, which will maintain a 10% interest in the permits

• a 15% stake from Dynamic Global Advisors, which is selling all of its interest to Total

Covering an area of more than 30,500 square kilometers, the exploration blocks are located offshore the Lamu Archipelago in water depths between 100 and 3,000 meters.

Readers of Crisis and Opportunity are owners of Cove Energy (London: COV), which has climbed 35% in the past month.

Anadarko (APC: NYSE) sold off 2.41% after selling out to the French, but it’s a much larger company than Cove, and it reacted to other negative news in the United States today…

Bold Explorer

Total’s senior vice president said, “This transaction is part of a bold exploration strategy that consists in acquiring large stakes in high-potential frontier plays. Recent discoveries in offshore Mozambique and Tanzania offer a very promising outlook for these Kenyan permits.”

Frontier markets and oil licenses are starting to move…

 Good hunting,

Christian DeHaemer
Editor, Energy and Capital