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Investing in Oil

Keith Kohl

Written By Keith Kohl

Posted August 24, 2009

If you’ve been expecting oil prices to plummet below $50 per barrel, you’re probably going to be waiting around for quite a while.

After watching crude prices find recent support around $65 per barrel, the question now is whether oil will finally find its legs at $75 a barrel. And if prices can rally past $75 a barrel, it’s only a matter of time before we see $80 — or even $85 — per barrel.

During the last few days, some readers have suggested $100 oil might be right around the corner…

But there’s a slight problem with that notion.

Ever since oil prices fell as low as $33 per barrel late last year, OPEC has repeatedly said that $75 per barrel is the fair and reasonable price.

Now that we’re nearing that price, I don’t see much momentum to hit triple-digits in the short run. Don’t get me wrong, we’re going to see $100/bbl oil again. I have no doubt about that. I just wouldn’t hold my breath. . . at least, not until we start seeing global demand pick up.

But don’t overlook the buying opportunity that’s right in front of us.

You see, people have been taking things for granted. First and foremost is the idea that the world’s oil supply is in great shape.

That couldn’t be further from the truth.

The Peak Oil Report You Overlooked

Late last year, the last thing people worried about was high oil prices. OPEC’s planned cutback in output hardly affected oil prices.

In the middle of that price crash, the IEA released their World Energy Outlook, and the sobering news was completely overlooked.

The report outlined how much we truly rely on those giant oil fields. More than one-quarter of our oil supply comes from just 20 giant oil fields — all of which are in some stage of decline. Furthermore, about 50% of our global supply is from another 110 oil fields.

Now, if you want to take an example of how bad things can get for these fields, look no further than the once-mighty Cantarell oil field in Mexico.

Discovered by a fisherman in 1976, Cantarell was once the third-largest oil field in the world, pumping out more than 2 million barrels per day.

Today, the field produces a little more than 700,000 barrels per day.

Pemex is scrambling to make up for the loss of production, especially after it announced that output fell by 7.8% last month. The state-owned oil company plans to spend nearly $20 billion to develop new deposits.

It’s difficult to think that Pemex can stop the bleeding at this point. I also wouldn’t be surprised if Mexican imports to the U.S. dried up completely within the next 5-10 years. To give the situation some perspective: that’s another 1.3 million barrels per day we’ll need to find in the future.

Don’t think that OPEC is immune to the problem. Last month, OPEC announced a 2 million barrel/day increase in natural gas liquids and condensate from projects starting up by 2010. Of course, the main reason for this increase is "the critical need to boost natural gas output for re-injection at aging oil fields."

So where does that leave us?

I’ll get to that in just a second. . .

The Problem with Scale

As if decline rates weren’t enough to deal with, the greater problem is bridging the energy gap.

No matter how you slice it, the fact remains that fossil fuels still make up a staggering amount of our energy demand. In the United States, oil, coal, and natural gas make up 84% of our consumption.

Here’s a breakdown of our total energy consumption, according to the EIA:


Renewable share of energy

There’s simply no getting around that fact.

This will eventually change, but to suggest that oil isn’t going to play a massive role in our energy demand for years to come is nothing more than wishful thinking.

But like I’ve told readers before, this opens the door for investors. . . And there are 84 million reasons — every single day — that open this door wider.

Investing in Oil

As I’ve mentioned before, if oil prices can finally close over $75 per barrel over the next few days, a move to $85 is certainly within sight. Since oil prices under $60 per barrel would severely hinder new investments and future production, another price drop seems unlikely.

When that happens, the only question is where to look next.

With the decline of the world’s giant oil fields, the smaller fields will have to pick up the slack. That means a new surge in offshore and unconventional fields. You don’t need to be a trained geologist to realize that cheap oil is a thing of the past. Trust me, dear reader, the death of giant fields like Cantarell are just the beginning.

Think about it: Until we can bridge the energy gap to renewables, oil will retain its throne atop the energy platform.

Of course, it’s easy for some investors to dismiss the potential investments in oil (especially after last year’s crash), but I’ll let them sit on the sidelines and watch my readers ride their fear all the way to the bank.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

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