Value Microcaps Motherboard

[lentinman]

Bob:

I understand Peak oil. But, here is my argument. You may not agree, but this is how I see it.

I'm willing to accept that oil may be past the peak. Some say it isn't, but let's say it is for the sake of this discussion. However, in that article, the increase in rigs was a HUGE percentage (+20%). I realize that is not 20% more throughout the world, but even taking North America as a percentage of the world's oil production, it is still at least 5% more oil being produced.

Now, even if you accept that the peak production has already occurred, we are very near the top of the bell curve right now. The actual amount of lower production based on having crossed the peak simply could not be more than a 2% drop off from the previous production per year. Probably more like 1% or less. Down the road, it will possibly drop faster - conceivably, as much as 5% annually. But, not today.

Therefore, my argument is that even if we are losing 2% per year on peak production declines, we gained 5% on the huge increase in drilling. And, that doesn't even deal with what I consider to be the REAL issue - demand.

I believe demand is slowing quickly and will continue to slow. Frankly, storage had not diminished during the past year. If you slow demand 3-4M bbls per day (from a world usage of about 81M bbls per day) as I estimate in one year from now, while increasing production as much as 3% (2.5M bbls), you are definitely going to have a glut.

Obviously, these numbers are just estimates and very well may not be right, but I think it is in the cards. And, it would simply reflect the way these things work. You get astronomical prices on a product... everyone starts producing at the exact same time that consumers start rebelling. So, you end up with a glut.

Anyway, that is my story and I'm sticking to it. I would not be surprised if you start hearing more and more chatter about excess oil due to lower demand and, finally even increased production. Boom and bust.

If so, these rig companies could be in for a HUGE decline in the months to come - similar to semiconductors in 2000-2002.

EDIT: Rogue's article does a pretty good job of making the same case I'm making. And, I should reiterate, I'm not bearish on oil LONG-TERM - actually quite bullish. I'm just bearish over the next year or two - or less if oil really takes a big time hit.

Len