Oil supplies are going to get very tight in the years ahead. You don’t have to take my word for it as a German military think tank has produced a report that warns of coming energy crisis. The think tank called the Bundeswehr Transformation Center, states a crisis in the near future is increasingly inevitable.
The Bundeswehr Center believes peak oil will be reached this year, and crude oil production will decline into the future. And if you don’t believe the Germans, be aware that a US military analysis (the Joint Operating Environment 2010 report) saw a peak oil energy crisis coming possibly as early as 2012. Over time the risk of an energy crisis only grows as demand for energy is predicted to double from current levels by 2030.
And if you don’t believe the German report, or the American report you should also be aware of the UK Industry Task Force on Peak Oil which also reached similar conclusions earlier this year.
Higher oil prices are here to stay. I believe if you spend the time to do some reading on the subject that is almost indisputable. Briefly, here is why:
1) The 18 largest oil fields in the world were all discovered before 1976. The big fields that are easiest/cheapest to produce have all been found. Despite huge steps forward in the technology used to find oil reserves, we just can’t find fields of the magnitude of what was discovered in the 50s and 60s.
2) As the production from these giant fields decreases, the world struggles to bring enough small field onto production just to offset the decline rates .
3) So we aren’t running out of oil. But we are reaching the maximum amount we can produce every day because we can’t replace the declining production from the very largest fields fast enough.
4) Much of the new production that we do bring on is from more expensive sources such as the Deepwater or the Canadian Oil Sands, so that increased marginal cost of production will keep prices higher.
5) While we struggle to barely grow production, or at least keep it flat the demand for oil from the 75% of the world that lives in emerging economies continues to increase as they move to a more Western style of living.
6) It is a two edged sword. Problems with supply, and an ever growing demand. If one doesn’t push oil prices higher the other one will. Put them both together and the result is obvious.
I’ve been trying to add exposure to oil reserves in my portfolio and will continue to do so. I think many companies in this sector are very attractive right now, with Deepwater Gulf of Mexico producers and drillers being bargain priced.
Here are the companies I currently own and have written about:
Canadian Natural Resources (NYSE:CNQ)
Sprott Resource Corp (SCP.to)
Penn West Energy (NYSE:PWE)
ATP Oil and Gas (ATPG)
Canadian Oil Sands Trust (COSWF)
Sandridge Energy (NYSE:SD)
Petrobank Energy (PBG.to)
Stone Energy (NYSE:SGY)
Diamond Offshore (NYSE:DO) and Ensco (NYSE:ESV)
Cobalt International (NYSE:CIE)
Enerplus Resources (ENH)