ProShares Ultra Oil & Gas ETF (DIG)

[frenchee]

$60 Oil…And Why it Won't Last
By Byron King

I've been getting a lot of calls and e-mails from people asking about the falling prices for oil in recent weeks. The immediate explanation is that world economic activity is decelerating. Demand is falling. OPEC announced cuts in output. But the markets still believe that economic decline will trump the ability of OPEC to prop up the price of oil.
Enjoy cheap oil while it lasts.
Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically: "Current global trends in energy supply and consumption are patently unsustainable."
There's not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supplies are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market.
The IEA performed a comprehensive study of 800 of the world's largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That's an average. We see depletion rates in excess of 15% in Mexico's Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there's no reason why it won't), the base of world oil output could conceivably dry up within seven-10 years.
Don't get me wrong. The world won't run out of oil in seven-10 years. That's not how it works. It's just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman's noose around the collective neck of the oil-consuming world.
So how long will we have to wait for this "future" to show up? Well, how long will the current worldwide recession last? I don't know. But I do know that if you can afford to be patient with your funds, you should be buying at this very moment the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas. These firms should eventually stage a comeback as oil prices rise again.
According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.
Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars just to bail out the banks and bankers, not one of whom runs pump jacks.)
The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances. And these "other kinds" tend to be very expensive to develop.
There are many different kinds of hydrocarbon molecules in the world. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I'm just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.
The big problem for the non-oil forms of carbon is the cost of converting it into a viable fuel. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input -- all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel.
The tar sands are full of hydrocarbons, but they are not inexpensive to extract. The same goes for every other non-convention hydrocarbon source.
The nearby chart shows the total hydrocarbon resources in the world and the relative costs to convert them into a barrel of oil or oil equivalent. This is my summary, based on several different government and academic compilations: