Money and Markets Wednesday, May 3, 2006
Dear Subscriber,
What a wild, wild day in the commodities markets yesterday — oil soaring higher as Iran told the U.S. and the U.N. to go to hell ... nervous Gulf oil sheiks pouring their money into gold ... investors going bananas after Bolivia nationalized its oil industry ... and more.
Adding fuel to the fire, Deputy Iranian Oil Minister Hosseinian told a news conference in New Delhi that oil prices will spike to $100 per barrel this winter.
But all these are just the short-term symptoms of a far deeper, long-term problem ...
The Peak in Global
Oil Production Is
Here or Very Near!
From this point forward, production could be downhill all the way, with far-reaching consequences for virtually every human being walking the planet.
Until recently, no one paid attention to this. Even now, despite some recognition by the mainstream media, the talking heads take great pains to say it’s “decades away” — “something for your children and grandchildren to worry about.”
I think that’s a bunch of malarkey.
As I see it, you can either let this trap you into a mighty hole ... or you can use it to your great advantage. I’ll show you how in a moment. But first, let me clear away some misunderstandings.
This Isn’t About Running out of All Oil.
It’s About Running out of CHEAP Oil!
I’m talking about a phenomenon called “Peak Oil.”
Peak Oil is that critical threshold beyond which most of the easy-to-reach, cheap oil is depleted ... and mostly harder-to-reach, expensive oil remains.
Peak Oil is the all-important juncture where in-the-ground oil reserves are so depleted that global production tops out.
Peak Oil is the turning point beyond which oil production begins an irreversible, long-term decline.
That’s where I think we are today, or very, very close.
Behind all the market ups and downs, beyond all the political maneuvers, I think Peak Oil is the underlying phenomenon that’s beginning to play a bigger role in powering oil’s unstoppable surge in value.
The Perfect Storm
On the Horizon
Multiple forces are converging in one time and place. Consider the facts ...
Fact #1. Over the last four years, the world has been consuming six barrels of oil for every new barrel found.
Big oil companies continue to add to their reserves, but mainly by buying up smaller oil companies. That does nothing to boost the available reserves overall. For example,
Exxon (NYSE: XOM) replaced 112% of its reserves only by counting natural gas from Qatar. (Hah! Not many cars run on that!)
Shell (NYSE: RDS.A) replaced only 65% of its production last year.
Other examples abound.
Big Oil Companies Don’t Seem to Be in
Any Great Hurry to Find More Oil, Either.
According to The New York Times, Exxon used to invest two dollars in exploration for every dollar returned to shareholders.
But after 1997, its investments in exploration dropped to one for one. And by 2005, it was investing only $0.70 for every dollar distributed to shareholders.
So despite record profits, Exxon simply isn’t spending the money it should to find more oil. Maybe that’s because they know the cheap, easy oil has already been found.
Fact #2. Crude oil prices are already at their highest levels in decades — even BEFORE the next round of hurricanes ravages the Gulf of Mexico.
When Hurricane Katrina shut down 1.4 million barrels of daily oil production and curtailed activity at 14 refineries, oil prices surged to $70 per gallon.
Now, here we are, just weeks away from the start of this year’s hurricane season, and more than 20% of Gulf of Mexico oil production (and 13% of natural gas production) remains offline. And guess what! Oil prices are already far above the post-Katrina peak!
How high do you think oil prices will go if more hurricanes pound the Gulf this summer? How much more production will go offline?
No one knows. But one thing is clear: The oil that’s under the Gulf of Mexico isn’t nearly as easy or as cheap to get as it was thought to be. That’s the essence of Peak Oil.
Fact #3. The globe is already being
strangled by a supply/demand crunch!
The International Energy Agency estimates 2006 world oil demand at 85.1 million barrels per day (bpd).
But in March, world oil supply fell 125,000 bpd to an average 84.5 million bpd, in part because of lower output from Nigeria, Canada, and the U.K.
In other words, supply is already failing to meet demand — and that’s without a catastrophic disruption of oil production anywhere!
Fact #4. Major oilfields
are already in decline.
Our Texan oilfields hit peak production decades ago.
Next was the North Sea, now depleting at about 15% a year.
Last year, Kuwait admitted its super-giant Burgan oil field was in decline.
Most recently, Mexico confessed that its super-giant oil field, Cantarell, is irreversibly declining and may be heading for catastrophe due to complications from new technology used to accelerate oil production.
Cantarell provides 60% of Mexico’s oil production, which, in turn, produces 8% of the country’s gross domestic product and pays nearly 37% of the nation’s taxes.
So if you think immigrants from Mexico are flooding over our borders now, just wait until Cantarell taps out. Peak Oil again!
The final fact: Global oil production hasn’t significantly increased since 2004. Heck, if that isn’t evidence of Peak Oil, what is?
Kuwait Caught Cheating:
Who in OPEC is Next?
Some months ago, Petroleum Intelligence Weekly got hold of internal Kuwaiti documents indicating that country’s true reserves were less than half its claimed 97 billion barrels.
This news came out shortly before Kuwait announced its Burgan field had peaked.
Peak Oil strikes again!
Good thing that the Kuwaitis still have a lot of oil — 48 billion barrels.
That’s more than twice what’s left in the U.S., and three times the North Sea’s remaining oil reserves.
So why would the Kuwaitis cheat?
Because Kuwait’s production quota with OPEC is based on estimated reserves. And pumping out the maximum amount of reserves ... raking in big revenues ... and dishing out some of that money to the population is what helps keeps the lid on simmering internal dissent.
Now here’s the interesting thing: A bunch of OPEC nations jacked up their reserve estimates enormously when the quota system was first introduced. And despite constant pumping for decades, they claim they’ve found enough new reserves to make up for the depletion.
Convenient, isn’t it? My view:
A Meeting by OPEC Is Like
A Meeting at the Liar’s Club!
I think some of their claimed reserves will prove to be hot air. And when that leaks out, the rest of the world will belatedly discover Peak Oil.
Consider Saudi Arabia, the world’s largest oil producer, claiming to have a quarter of the world’s proven reserves, or 262 billion barrels.
About 90% of Saudi production has come from five oil fields on the eastern edge of the Saudi peninsula. These fields are decades old. One is 65 years old.
Saudi Arabia’s biggest field, Ghawar, produces between 3.5 million and 5 million bpd — about half of Saudi capacity of 10.4 million bpd. But exactly how much Ghawar produces is unclear. The Saudis fudge their numbers more than Betty Crocker, and they refuse to let any outsiders check their books.
What we do know is that production from existing Saudi fields is declining 5% to 12% a year, according to the U.S. Energy Information Administration. So the Saudis have to bring on that much new production just to stay level.
Saudi Arabia is also the “central bank of oil.” So you’d think that all they’d have to do is drill another hole in the desert. But in the real world, it doesn’t work that way.
If it did, why would Saudi Arabia be so busy hiring sea-going jack-up oil rigs used for drilling offshore oil wells? Drilling for oil underwater is very expensive. Moreover, the Saudis are even buying out contracts from existing customers, paying obscenely high rates to get those rigs. If they’re going to all the trouble, they must be doing it for a reason, right?
I think that reason is Peak Oil!
Important: Right now, Saudi Arabia is the only nation that claims to have some spare oil production capacity.
But lo and behold, those claims have not panned out in the actual production numbers. If anything, Saudi production has been off its peak for months. And in January, it was down 1% from the year-earlier period.
Another symptom of Peak Oil? You’d better believe it!
Maybe the Saudis don’t really have as much oil as they say they do. Last year, they confessed that OPEC won’t be able to meet Western oil demand in 10 to 15 years (another a bombshell the mainstream media ignored).
Saudi Ghawar Field:
Ripe for Catastrophic Failure?
Some experts like Matthew Simmons, a former energy advisor to President Bush, says yes!
The reason: Over-drilling and over-reliance on technology to keep up production. And by “catastrophic,” Simmons doesn’t mean a comfortable 10% decline per year in production. He means a sudden and sharp plunge in crude oil output.
More evidence of Peak Oil!
Will New Drilling
Technology Save Us?
No. The faster we drill the more quickly we deplete the oil wells!
Indeed, technology has increased the target recovery rate from existing oil fields to 35% from 22% in 1980. In other words, 35% of a reservoir’s total oil can be recovered.
However, most new technology just allows you to get oil out of a well FASTER. As a result, this only increases the rate of “depletion,” and hastens the day when oil production will start falling.
Worldwide, estimated rates of depletion run as high as 8% a year. Fields that have been pumped using new technology start depleting at around 15% a year, sometimes as much as 30% annually.
Will Corn Ethanol
Do The Trick?
No. When making ethanol from corn, the energy return on the energy invested (EROEI) is only about 1.5 to 1. Not good.
Sure, other forms of ethanol production are higher — the EROEI on sugar cane ethanol, for example, is a very respectable 8 to 1. But due to a powerful farm lobby, America is focusing its efforts on corn-based ethanol. Fatal error.
Will Canada’s Oil
Sands Save Us?
No. Canada says that by 2025, its tar/oil sands will yield no more than three million bpd of oil-equivalent production. And right now the U.S. is already using close to 21 million bpd. Moreover, in Canada’s oil sands, the rate of production is painfully slow and the energy consumption to get the oil out, very costly.
Where to Invest for Peak Oil
You can get the biggest bang for your buck with long-term oil options (LEAPS). The ones Larry recommended just this week, for example, are targeting turning $6,000 and change into nearly $40,000. Some questions and answers ....
1. Do you have any follow-up questions on this?
Yes? Then call 1-877-719-3477 for more information.
2. Which stocks is Larry targeting next? One of the best bets in this environment: Oil drillers!
3. Why oil drillers?
Because as the oil supply/demand squeeze becomes more acute — and it will — you can expect oil drillers to have customers lining up at the door. And as long as prices keep moving higher, drillers will be able to charge pretty much what they want.
Two Mutual Funds
Alternatively, consider these two mutual funds:
U.S. Global’s Global Resources Fund (PSPFX) is consistently one of the top performing funds in its category. It has a stake in Petroleo Brasileiro (NYSE: PBR), Brazil’s national oil company, one of the few major oil companies that consistently finds enough oil to more than replace the reserves it pumps every year.
Other PSPFX holdings include National Oilwell Varco (NYSE: NOV), Sunoco (NYSE: SUN), Grant Prideco (NYSE: GRP), and Suncor Energy (NYSE SU) — all great energy plays. PSPFX gets four stars from Morningstar, has a total expense ratio of 1.3% (lower than the category average), a 17.4% year-to-date return, and some of the sharpest management in the business.
Enerplus (ERF), our favorite Canadian royalty trust with a substantial interest in oil and natural gas properties. This stock has been on a rocket ride with the price of oil, and you get a nice 8.2% dividend yield to boot.
Yours for trading profits,
Sean
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