What does this chart from the U.S. Energy Information Administration (EIA) tell you?
Exactly. There has been a dramatic decline in U.S. oil production.
The amount of crude oil produced per day per well went up in the 1960s. It reached a peak of 18.6 barrels per day per well in 1972. After 1972, productivity generally declined. The 2008 rate of 9.4 barrels per day per well was 49% below the peak – the lowest since the EIA began reporting oil well productivity.
Now, what does this chart tell you?
Right again. World crude oil production has basically flat-lined since 2005. And production is not going to increase anytime soon. Consider the words of Andrew Hall. (He’s the Chairman of Phibro LLC and a phenomenally successful oil trader.) He recently said that “oil production in many parts of the world has already peaked and entered a terminal decline.”
What About New Discoveries?
It’s true. Oil companies have found new sources. Last September, BP announced a giant oil discovery in the Gulf of Mexico. Estimated size? 3 billion barrels. Woohoo! The problem is, the field is six miles beneath the surface of the Gulf. So, like many new sources, it’s going to be expensive to get to it. And only 500 million barrels are recoverable with today’s technology.
To put this discovery in perspective, 500 million barrels would supply the world for a scant six days. In the end, this new oil will simply offset diminished production in existing oilfields.
Whether or not the world is running out of oil is open to debate. But, it most assuredly is running out of cheap oil.
Demand
According to the EIA, the world oil market should gradually tighten in 2010 and 2011. Demand will begin to grow again as the global economic recovery continues.
So now let me ask you to look at another chart.
World Population Growth
We’re in the midst of a population explosion. The world’s population currently stands at 6.6 billion. We are projected to reach 7 billion by 2012 and 8 billion by 2025. An undeniable long-term trend.
Will 1.4 billion more people on the planet in the next 15 years create any additional demand for energy?
What does this final chart tell you?
Yup. There’s no way to stop it. Global energy demand is rising.
And despite the U.S.’s EIA saying that nuclear energy consumption in America could increase from 8 quadrillion BTU to 16 quadrillion BTU by 2030, the world will still be dependent on oil for years to come.
Where to Invest
There are many ways to profit from this trend. One option is to invest in energy ETFs – and there are lots to choose from. Or you could invest in the large vertically integrated oil companies. That gives you exposure to oil and natural gas as well as to refining and distribution.
If you’re looking for more upside, try investing in the small and medium-sized oil exploration and development companies. To expand their reserves, the bigger companies will be swallowing many of them up in the next year or two.
It’s really simple. All you need to know about oil is that supply is flat and declining. And demand is increasing. For more specific energy investments, see Sound Profits.
Email us at: feedback@investorsdailyedge.com
Disclaimer…The subject matters expressed above is based purely on technical analysis and personal opinions of the writer. it is not a solicitation to buy or sell.
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