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Oil Price Outlook: Correction or Crash?

Keith Kohl

Written By Keith Kohl

Posted May 13, 2011

In the face of a harsh sell-off after a run-up to $115 per barrel — a 22% gain since we rang in the New Year — crude continues its struggle to stay north of $100 per barrel today.

But we’re not backing down from our bullish stance…

Even Goldman Sachs can’t deny oil’s medium- and long-term potential. One of the firm execs was quick to point out that the market will experience “critical shortages” as early as next year.

The EIA shares the same sentiment. In its latest Short-Term Energy Outlook released on Wednesday, oil consumption is expected to rebound in 2012.

According to the report, total world consumption will only grow by 1.4 million barrels per day this year — slightly lower than their previous projection. In 2012, demand will rise by 1.6 million barrels per day, an increase over prior estimates.

And if you think the world has been tightening its belt since the market crashed back in 2008, think again…

The world is consuming more oil and liquid fuels than ever before:

EIA world liquid consumptionClick image to enlarge

That’s right, dear reader… We’ve topped the 86.3 million bbls/d record set in 2007. Last year, we set the bar a bit higher, consuming 86.7 million barrels per day.

By 2012, the EIA believes global oil and liquid fuels production will reach 89.7 million bbls/d. That doesn’t bode well for everyone, considering global production peaked five years ago…

Congress Responds to $4 Gas

Clearly, the “Drill, baby, drill” mentality is alive and well in the footsteps of Congress.

You might remember a few days ago when we reported the drilling frenzy is going strong…

The surge in domestic drilling activity has been continuous for the last two years. In North Dakota alone, the number of rigs has jumped dramatically, with more than 95% of their 173 rigs drilling the Bakken and Three Forks Formations. This week, that activity just got another boost.

How could we not expect this? After all, we’re in the peak season of gas pump politics.

Responding to the country’s exorbitant gas prices (which now average $3.96 per gallon, according to the latest EIA petroleum report) the Republicans galloped into action.

This week, H.R. 1231 — conveniently entitled “Reversing President Obama’s Offshore moratorium Act” — passed through the House after a 243 to 179 vote.

In a nutshell, the bill opens up at least 50% of the available unleased acreage within the outer Continental Shelf (OCS), as well as orders the Secretary of the Interior to develop a five-year oil and gas leasing program, and to make a daily production goal of 3 million barrels of oil per day by 2027.

Hey, at least they’re optimistic.

And that’s not all…

On top of H.R. 1231, the House passed another bill to spur offshore production growth. If passed by the Senate, the bill gives the administration a 60-day deadline to act on new drilling permits. Currently, there is no deadline.

If the U.S. doesn’t act within the specified time frame, the permit would automatically be approved.

Remember, allowing drillers to develop the deep waters of the Gulf of Mexico isn’t at stake; that question was answered when the Obama Administration lifted the moratorium late last year.

Expediting the process, however, will go a long way for drillers, who are accusing the government of delaying the process.

On Tuesday, a federal judge ruled that the United States “unlawfully and improperly delayed” permits for deepwater drilling after BP’s incident at their Macondo well. The judge then ordered the administration to make a decision on six pending permit applications — within 30 days.

We’re not sure whether the Republican-heavy House expects this to actually affect gas prices. It reminds us of the same thinking of those individuals who faithfully believe drilling ANWR will solve our nation’s oil crisis.

We’re not even in the official summer driving season yet, which lasts from Memorial Day through Labor Day. Even with the time limit imposed, production won’t ease the short term crisis…

Don’t worry, we won’t rain on their parade.

The goal here is loud and clear: It’s time to increase offshore production.

Unfortunately, that’ll be much easier said than done. Companies keep one-upping each others’ record depth. It’s a testament to how far they’re willing to go for tomorrow’s oil supply. And we are referring to oil.

Like or not, fossil fuels will still dominate the world’s energy market for decades.

The EIA has projected they will continue to account for nearly 80% of the world’s energy in 2030.

Congressional Drilling Investments

Although we’re expecting the government’s thick red tape to prevent these bills from passing quickly, tapping our offshore resources is an inevitability.

The onshore drilling success we’ve had since developing the oil and gas resources locked in U.S. shale basins is not a panacea to our Peak Oil troubles.

Once they realize this fact, the clear winners from the latest Republican-led push for expanding offshore production will be the drillers we’ve had on our radar for years — many of which the market unfairly beat down after the Macondo disaster.

Next week, I’ll show you seven of my favorite offshore stocks and explain why they have a promising future if the recent offshore legislation comes to fruition.

Spoiler alert: Some of them aren’t even drilling in U.S. waters…

Until next time,


Keith Kohl
Editor, Energy and Capital

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