 The hard truth about crude
John Myers
January 19, 2004
The Daily
Reckoning PRESENTS: Our resource man, John Myers, ponders what
to expect from black gold as "social and political shock
waves will be felt worldwide once oil production peaks."
"The country
is facing the most serious energy shortages since the 1970s.
Without a solution, the energy crisis will threaten prosperity
and national security and change the way Americans live."
- Spencer Abraham,
U.S. Energy Secretary
Here are some
facts you should consider when debating whether oil is a profitable
investment opportunity. After reading these four bits of information,
I'm sure you'll agree there's money still to be made from black
gold.
- The United
States, with 5% of the world's population, consumes more than
one-quarter of the world's oil production
.
- The United
States is guzzling oil at record rates. In 2004 the United States
will consume 7.5 billion barrels of oil
.
- U.S. oil production
is at its lowest level since the early 1950s and is declining
by more than 2% per year
.
- Since 1970,
U.S. oil reserves have fallen from 50 billion to 20 billion barrels.
By the end of this decade, the United States will have less than
15 billion barrels in oil reserves
For these reasons
and then some, my investment advisory, Outstanding Investments,
is bullish on oil prices over the short term and throughout the
rest of the decade.
In December,
OPEC announced that it would not increase its output quotas despite
a wellspring of worries regarding the region - specifically the
situation in Iraq and the political instability of Saudi Arabia.
OPEC's refusal to open the spigots comes at a time when North
Sea and Russian oil production is in decline. This coming year
Canadian and Chinese oil production will rise, but their output
will not nearly offset the decline in the two previously mentioned
regions.
Decline in
oil production flies into the teeth of rising world oil demand,
projected to grow by about 1 million barrels per day in 2004.
Roughly one-third of this increase will be the result of increased
demand in the United States along with China.
Given these
supply and demand numbers, I believe that even if a political
calm settles in the Middle East, oil prices will move above $30
per barrel by the second quarter 2004.
During the
last two weeks of November, commercial crude oil inventories
in the United States fell by nearly 10 million barrels. On the
import front, evidence suggests that Middle East exports to Asia
are increasing, with the United States importing more oil from
Canada and Mexico. America's neighbors are a stopgap for oil
supplies, but neither country has the wherewithal to keep the
United States flush with oil for any time to come.
Meanwhile,
America's rotary rig count, which once totaled more than 5,000
active in the early 1980s, stands just above 700 today. Even
with crude oil prices above $28 a barrel, American oil companies
have slashed domestic exploration budgets because they understand
one fact - America is drilled out.
Since 2000,
U.S. oil companies have replenished their reserves by acquiring
other oil companies, many of which are headquartered in Canada.
These Canadian companies have significant reserves and will continue
to provide an expedient solution to America's brewing energy
crisis.
In short, I
believe U.S. buyouts of Canadian oil and gas companies will continue.
And we're looking into more takeover candidates for OI recommendations.
But Canada
is not a panacea that will cure America's oil crisis. This was
supported by some somber predictions at a November energy symposium
in Ottawa, Canada. According to several of the industry's top
experts, Canadian and worldwide production of oil and natural
gas will peak sometime before 2020.
The only solution,
said symposium speakers, will be higher energy prices from the
gas pump right on through to household electricity.
University
of British Columbia professor Bill Rees, a well-known expert
on the world's remaining oil and gas stockpile, predicts that
"social and political shock waves will be felt worldwide
once oil production peaks."
The consensus
is that world production in both conventional oil and natural
gas could peak as early as 2017. America's energy crunch could
happen much, much sooner.
John Myers
January 16, 2004
P.S. A December 2003 Energy Information Administration release
states that "without a substantial increase in crude oil
imports... it may be difficult
to supply enough products for current demand."
Translation:
Crude oil, already expensive, will become more costly in 2004
and considerably more expensive during the second half of this
decade as domestic production and oil reserves decline.
OI Prediction:
We look for crude oil to break above $40 in 2004 even without
political or military calamity in the Middle East. In the event
of war, social upheaval or armed revolution in the Persian Gulf,
oil could spike to $50 per barrel...
and maybe
even more.
John Myers
- son
of the great goldbug C.V. Myers - has been helping readers earn
suprisingly lucrative returns in stocks largely unknown to Wall
Street's wunderkinder since his early 20s. Our man on
the scene in Calgary, John has his fingers on the pulse of natural
resource profits - including oil, gas, energy and gold. For John's
shocking exposé on the advent of the gold dinar,
click here: The
1,300-year
old Gold Dagger
This article
appeared on the The
Daily Reckoning
website.
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Inc
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