Peak Oil Again

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

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

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

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

And the breakthroughs are happening all around us.  North America is shortly going to embark on a fossil fuel free energy system expansion simply because the present regime cannot do the big job of full electrification of transport.

We Just Hit Peak Production

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

This is as clear a picture as you are likely to find 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 liquid energy 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 much oil, the price of oil was at an all time high of $147...

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

OPEC’s reserve

It should also be noted that non-OPEC fuel production has made up the majority of the increase, which leaves OPEC with some room to run.

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

Morgan Stanley’s economists have put out a bullish analysis:

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

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

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Head out on the highway

So-called emerging markets — those countries that are 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 indebted Europe and the United States.

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

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

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

Chinese oil drill

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

But did you know that Brazil has eclipsed Germany in car sales? Or that Russia is the fastest growing car market in Europe?

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

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

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

Putting oil in the tank

But China is further adding to the demand side by building its strategic petroleum reserve as a buffer against supply disruptions. The Chinese plan to go from 103 million barrels in holding tanks 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 claim that this will at $6.50 to every barrel of oil sold in 2011.

The upshot of this is that oil prices are going up this year, based on high emerging market car sales, global recovery, and China buying 397 million barrels to fill its reserve.

The best way to play this is to buy junior oil companies. 

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

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

Until then,

Christian DeHaemer
Editor, Energy & Capital