Peak Oil Again

This is of course a tout on oil stocks, but the message is important.  Present demand and production is now inbalance at levels that are the same as two years ago.  This blog has reported on the many replacementefforts and the revolution now taking place in oil development.  We actually will be able to produce severaltimes what has been produced to date at the present pricing regime.  It will still take a massive investment whichis certainly happening.

More disturbing is that the global economy is now notching into new highground and there may be no slack to handle sudden production shocks.  Anyone who wishes to identify a real blackswan that will hurt, this is the present vulnerability that is ready to really biteus.

I am optimistic today that the petro fracking revolution will soon solveall that much quicker than anyone expects. My sense is that we need to get through only the next three years tofeel much more secure.

The flip side for the oil business is that no one wants to pay theseprices even if we are doing it all inside North America.  Oil is simply a very expensive fueltoday.  It is so expensive, that mostalternatives are close to viability and are attracting huge investor attention.

And the breakthroughs are happening all around us.  North Americais shortly going to embark on a fossil fuel free energy system expansion simplybecause the present regime cannot do the big job of full electrification oftransport.

We Just Hit Peak Production

By Christian A. DeHaemer| Friday, January 7th, 2011

This is as clear a picture as you are likely tofind regarding the price of liquid energy including oil...

http://images.angelpub.com/2011/01/7023/1711_eacchart.png

Right now, the world is producing as much liquidenergy as it ever has before.

Part of this is due to an increase in liquid natural gas and biofuels, but the majority is from oil.

The last time the planet was producing this muchoil, the price of oil was at an all time high of $147...

(You could make the argument that the price wasdue to hedge fund speculation driving it higher.)

OPEC’s reserve

It should also be noted that non-OPEC fuelproduction has made up the majority of the increase, which leaves OPEC withsome room to run.

That said, it seems like a good bet that theincrease in global GDP for 2011 — coupled with the destruction of allmajor currencies — will continue to drive up the price of oil and gasoline.

Morgan Stanley’seconomists have put out a bullish analysis:

… our U.S.economists' 2011 GDP forecast to 3.6% from 2.9%. They also see a modest uptickin inflation to 2.1%, from 1.7% in 2010. A key pillar in this improving growthoutlook is exports.

In October, exportssurged 3.2% over September, and should contribute 3.2% of the 4.2% GDPgrowth in 4Q10. Looking forward, the strong growth in EM bodes well for U.S. growth, as it accounts for an increasinglylarge share of U.S.export, a reflection of global rebalancing.

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Head outon the highway

So-called emerging markets — those countries thatare developing at a fast pace like China, Indonesia, India, Chile,Israel, and Brazil, among others — have bounced back from their global recession much more quickly than the highly indebtedEurope and the United States.

And these countries need a constant expansion ofenergy to fuel their growth.

China, whorecently took the number one slot in auto sales from the United States, is alsothe world's leading energy consumer.

http://images.angelpub.com/2011/01/7016/china-energy-demand.gif

Chineseoil drill

I’m sure you’ve heard that China is expected to be the world’s largest automarket in 2011 with sales increasing 15 percent, usurping the United Statesin sales for the third year in a row...

But did you know that Brazilhas eclipsed Germanyin car sales? Or that Russiais the fastest growing car market in Europe?

A major investment theme of the past ten years is China's seekingout oil and energy around the globe.

The country recently gave Venezuela $40 billion to fund oil infrastructureprojects. 

In another example, the Middle Kingdom recentlybecame the world’s fourth largest offshore energy prouder — a task thatrequires a high degree of technical skill.

Puttingoil in the tank

But China is further adding to thedemand side by building its strategicpetroleum reserve as a buffer againstsupply disruptions. The Chinese plan to go from 103 million barrels in holdingtanks to 500 million barrels over the next few years. 

If they suck up just one third of it this year,that will equal 10% of the IEA’s forecasted increase in oil consumption.

Some prognosticators have done the math and claimthat this will at $6.50 to every barrel of oil sold in 2011.

The upshot of this is that oil prices are going upthis year, based on high emerging market car sales, global recovery, and China buying397 million barrels to fill its reserve.

The best way to play this is to buy junior oilcompanies. 

The last time oil went from $90 to $147 abarrel... these companies went up 1000%.

Not only will he let it happen... He will help it along.

Until then,

Christian DeHaemer
Editor, Energy& Capital