Sunday, November 02, 2008 9:15:09 AM
Why Your Oil Investments Are Still Profitable
By Keith Kohl | Thursday, October 2nd, 2008
http://www.energyandcapital.com/newsletter.php?date=2008-10-02
"Beginning this moment, this nation will never use more foreign oil than we did in 1977-never."
When Jimmy Carter uttered these words during his Crisis of Confidence speech in 1979, the U.S. was importing eight and a half million barrels of oil every day. At the time, we were dependent on foreign imports for approximately 40% of our oil demand.
He wasn't the only President with energy independence in mind.
Four years earlier, President Ford wanted to lower oil imports by two million barrels per day before 1978. Rather than falling, imports rose more than 2.3 million barrels per day. His plan, however, was less ambitious than Nixon's goal to completely eliminate our energy dependence by 1980.
During the ten years after President Carter stated his energy goals, things appeared brighter. According to the Energy Information Administration [http://tonto.eia.doe.gov/dnav/pet/hist/mttimus2a.htm ] , our imports of crude oil and petroleum products fell to as low as 5 million barrels per day in 1985, or about 40% since Carter's speech.
Today is a much different story. So before I tell you how to invest in oil, let's go over our current situation...
Blindsided by Peak Oil
Here's how the U.S. is stacking up today:
Crude Oil Production has dropped to 5.064 million barrels per day. U.S. oil production peaked 38 years ago in 1970. Since then, we've been going downhill. My Energy and Capital readers know that the U.S. is producing roughly the same amount of oil it did in 1947.
Imports of Crude Oil and Petroleum Products was 13.4 million barrels per day in 2007. If you thought 40% dependence on foreign oil during the Carter administration was a lot, now take into consideration that foreign oil makes up 67% of our oil consumption.
Crude Oil Consumption reached 20.6 million barrels per day in 2007. That's approximately 40% of our total energy consumption, with coal and natural gas coming next in line. Despite the different energy programs over the last 3 decades, fossil fuels remain the dominant source of our energy consumption.
Since U.S. oil production peaked three decades ago, that fact is that we are consuming one-quarter of the world's oil supply, yet only producing 5% of it. In other words, our addiction to foreign oil shouldn't come as a surprise for us.
The problem, however, is that peak oil is no longer just a U.S. problem.
Struggling to Produce Oil
When the subject of our country's oil addiction comes up, the rhetoric coming from Washington has been to reduce and eventually eliminate our dependence on foreign oil. Naturally, they mean oil originating from the Middle East. OPEC's oil.
In order to achieve that goal, that means the U.S. needs to find an extra six million barrels every day. Saudi Arabia is providing over 1.6 million barrels per day alone. We might not have to worry too much about reducing Saudi imports, however. First take into account that production at the Saudis' biggest oil field (and the world's largest, for that matter, Ghawar, is now in decline.
Today, nine out of the world's ten largest oil fields are in decline. In fact, 94% of global production comes from just 1500 giant oil fields. Finding replacements is even more difficult, considering that discoveries of these giant oil fields peaked more than forty years ago.
The U.S. only has two options to make up for the loss of Middle Eastern imports: either boost its domestic drilling or increase their Canadian imports.
What about Mexico? Isn't Mexico one of our biggest importers?
Mexican production, unfortunately, is heading in a downward spiral. Their massive Cantarell field is in serious trouble. Pemex reported that oil production at Cantarell has fallen 29.2% to a mere 1.1 million barrels per day. As if that were not enough, Mexico's second-largest field, Ku-Maloob-Zaap dropped 39%. Let's not forget that nearly 40% of the country's budget is generated from oil revenues.
Imports from Mexico were down almost 400,000 barrels per day in July compared to 2007.
Investing in Oil: The Profitability of Your Oil Plays
Although oil prices have been hammered for the last three months, our long term outlook hasn't changed. The fact remains that oil, coal and natural gas remain our predominant form of energy. On a global scale, fossil fuels still make up 86% of primary energy production.
Regardless of when oil prices begin to rebound, one thing we can count on is that the U.S. will continue to shake-off its addiction to Middle Eastern oil. As I just mentioned, it's going to come down to increasing domestic production and/or relying on Canadian imports. Granted, we won't be able to make up the six million barrels per day we need to walk away from OPEC, but that certainly doesn't mean we won't do what we can.
The bottom line is that the producers are going to be back on top again, and sooner than you might imagine. Energy companies have been slapped hard for the last three months. This means there are a ton of quality companies that investors can pick up at a discount. I prefer to stick with the drillers that have the property and experience to extract our future oil supply.
Investing in Oil: The Canadian Bakken
With that in mind, I see two ways for investors looking to get a piece of the Canadian side of the Bakken.
The first is to look carefully at the smaller producers. Granted, they may not be spending the most or even have the most money in the bank, but they're also not trading for $100 a share. In other words, they can give you the most bang for your buck. They are also, however, a lot more riskier than some of the major players.
As I've said previously, look at Canadian oil stocks like TriStar Oil and Gas (TSX: TOG). The good part is that TriStar seems to be gaining steam.
The second option available for us are oil companies in Alberta expanding their operations into Saskatchewan. If you've been a reader of Energy and Capital for some time, then odds are you know my stance on the Alberta oil sands.
Ever since Alberta has changed their royalty rates, companies are starting to see the grass is greener on the other side of the fence. Over the last few months, some of my favorite oil sands companies have been staking a claim in southeast Saskatchewan.
But no matter how you go about with your personal investments, the most important advice I can offer is that you should always do you own due diligence. Above all else, make sure you comfortable with the company before dishing out your cash.
Until next time,
Keith Kohl
>
By Keith Kohl | Thursday, October 2nd, 2008
http://www.energyandcapital.com/newsletter.php?date=2008-10-02
"Beginning this moment, this nation will never use more foreign oil than we did in 1977-never."
When Jimmy Carter uttered these words during his Crisis of Confidence speech in 1979, the U.S. was importing eight and a half million barrels of oil every day. At the time, we were dependent on foreign imports for approximately 40% of our oil demand.
He wasn't the only President with energy independence in mind.
Four years earlier, President Ford wanted to lower oil imports by two million barrels per day before 1978. Rather than falling, imports rose more than 2.3 million barrels per day. His plan, however, was less ambitious than Nixon's goal to completely eliminate our energy dependence by 1980.
During the ten years after President Carter stated his energy goals, things appeared brighter. According to the Energy Information Administration [http://tonto.eia.doe.gov/dnav/pet/hist/mttimus2a.htm ] , our imports of crude oil and petroleum products fell to as low as 5 million barrels per day in 1985, or about 40% since Carter's speech.
Today is a much different story. So before I tell you how to invest in oil, let's go over our current situation...
Blindsided by Peak Oil
Here's how the U.S. is stacking up today:
Crude Oil Production has dropped to 5.064 million barrels per day. U.S. oil production peaked 38 years ago in 1970. Since then, we've been going downhill. My Energy and Capital readers know that the U.S. is producing roughly the same amount of oil it did in 1947.
Imports of Crude Oil and Petroleum Products was 13.4 million barrels per day in 2007. If you thought 40% dependence on foreign oil during the Carter administration was a lot, now take into consideration that foreign oil makes up 67% of our oil consumption.
Crude Oil Consumption reached 20.6 million barrels per day in 2007. That's approximately 40% of our total energy consumption, with coal and natural gas coming next in line. Despite the different energy programs over the last 3 decades, fossil fuels remain the dominant source of our energy consumption.
Since U.S. oil production peaked three decades ago, that fact is that we are consuming one-quarter of the world's oil supply, yet only producing 5% of it. In other words, our addiction to foreign oil shouldn't come as a surprise for us.
The problem, however, is that peak oil is no longer just a U.S. problem.
Struggling to Produce Oil
When the subject of our country's oil addiction comes up, the rhetoric coming from Washington has been to reduce and eventually eliminate our dependence on foreign oil. Naturally, they mean oil originating from the Middle East. OPEC's oil.
In order to achieve that goal, that means the U.S. needs to find an extra six million barrels every day. Saudi Arabia is providing over 1.6 million barrels per day alone. We might not have to worry too much about reducing Saudi imports, however. First take into account that production at the Saudis' biggest oil field (and the world's largest, for that matter, Ghawar, is now in decline.
Today, nine out of the world's ten largest oil fields are in decline. In fact, 94% of global production comes from just 1500 giant oil fields. Finding replacements is even more difficult, considering that discoveries of these giant oil fields peaked more than forty years ago.
The U.S. only has two options to make up for the loss of Middle Eastern imports: either boost its domestic drilling or increase their Canadian imports.
What about Mexico? Isn't Mexico one of our biggest importers?
Mexican production, unfortunately, is heading in a downward spiral. Their massive Cantarell field is in serious trouble. Pemex reported that oil production at Cantarell has fallen 29.2% to a mere 1.1 million barrels per day. As if that were not enough, Mexico's second-largest field, Ku-Maloob-Zaap dropped 39%. Let's not forget that nearly 40% of the country's budget is generated from oil revenues.
Imports from Mexico were down almost 400,000 barrels per day in July compared to 2007.
Investing in Oil: The Profitability of Your Oil Plays
Although oil prices have been hammered for the last three months, our long term outlook hasn't changed. The fact remains that oil, coal and natural gas remain our predominant form of energy. On a global scale, fossil fuels still make up 86% of primary energy production.
Regardless of when oil prices begin to rebound, one thing we can count on is that the U.S. will continue to shake-off its addiction to Middle Eastern oil. As I just mentioned, it's going to come down to increasing domestic production and/or relying on Canadian imports. Granted, we won't be able to make up the six million barrels per day we need to walk away from OPEC, but that certainly doesn't mean we won't do what we can.
The bottom line is that the producers are going to be back on top again, and sooner than you might imagine. Energy companies have been slapped hard for the last three months. This means there are a ton of quality companies that investors can pick up at a discount. I prefer to stick with the drillers that have the property and experience to extract our future oil supply.
Investing in Oil: The Canadian Bakken
With that in mind, I see two ways for investors looking to get a piece of the Canadian side of the Bakken.
The first is to look carefully at the smaller producers. Granted, they may not be spending the most or even have the most money in the bank, but they're also not trading for $100 a share. In other words, they can give you the most bang for your buck. They are also, however, a lot more riskier than some of the major players.
As I've said previously, look at Canadian oil stocks like TriStar Oil and Gas (TSX: TOG). The good part is that TriStar seems to be gaining steam.
The second option available for us are oil companies in Alberta expanding their operations into Saskatchewan. If you've been a reader of Energy and Capital for some time, then odds are you know my stance on the Alberta oil sands.
Ever since Alberta has changed their royalty rates, companies are starting to see the grass is greener on the other side of the fence. Over the last few months, some of my favorite oil sands companies have been staking a claim in southeast Saskatchewan.
But no matter how you go about with your personal investments, the most important advice I can offer is that you should always do you own due diligence. Above all else, make sure you comfortable with the company before dishing out your cash.
Until next time,
Keith Kohl
>
PEAK OIL #board-6609
PEAK OIL - SUSTAINABLE LIVING #board-9881
PEAK NATURAL RESOURCES #board-12910
PEAK WATER #board-12656
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
