Ken Farsalas

Worldwide supply of oil has been able to keep up with demand, so far. Global production has increased from 64 million barrels per day in 1980 to more than 84 million barrels per day in 2006. Yet the data suggest that, even with advancements in drilling and completion technology, it may become more difficult for supply to keep pace with accelerating demand in the future. American oil production has declined 22% from 1980 to 2006.
The EIA says Saudi Arabia, the world’s largest producer and home to the world’s biggest oil reserves, produced 10.6 million barrels per day in 2006, little changed from 1980 production of 10.3 million barrels. The kingdom recently announced its intention to increase production capacity to 12.5 million barrels per day by mid-2009. Its ability to do so will be watched closely by those experts who contend that Saudi oil fields either have reached or will reach peak production in this decade.

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  1. shinichi Post author

    No Speculation On Oil Reality

    by Ken Farsalas

    The Oberweis Report

    Forbes

    7/29/2008

    http://www.forbes.com/2008/07/29/carrizo-willbros-dawson-pf-ii-in_kf_0729soapbox_inl.html

    Look no further than the crude oil market for a case study in price volatility and rapidly changing investor sentiment. Earlier this month, in the face of $147 crude oil, the bulls were stampeding and brazenly promoting price targets of $200, $250 or more. Politicians were assailing the dreaded “speculator,” probably because it’s easier to blame a fictional villain than look in the mirror and accept responsibility for contributing to an inept (or arguably nonexistent) national energy policy.

    Yet that was then, and this is now. Now, after a rapid 16% decline from the peak on July 11, the oil bulls have vanished into the FBI’s witness protection program. The bears are on the prowl, talking about “demand destruction” resulting from a weakening global economy, fewer miles driven by American motorists and a rumored armada of oil tankers steaming to our shores from Saudi Arabia to save the day. The oil bubble has burst.

    Was it a bubble? Whom to believe: the brazen bulls of two weeks ago or the bearish naysayers who claim the run-up in oil prices was a farce to begin with? When investor sentiment swings like a pendulum as quickly as it does in this environment, we find it helpful to check our emotions, look at the facts, and dust off the old economics textbook and revisit the concept of “supply and demand.”

    The facts suggest that we are addicted to oil and that the rest of the world is becoming addicted too. Growth in demand for crude oil has accelerated in each of the last three decades. Between 1980 and 1990, according to the Energy Information Administration (EIA), worldwide daily demand grew 5.7%. Demand growth accelerated to 15% between 1990 and 2000 and should accelerate again in this decade, with growth of 10% already from 2000 through 2006.

    OPEC estimates that the world will demand 113 million barrels of oil per day in 2030, up more than 33% from 2006. This estimate, according to OPEC, “reflects greater efficiency improvements due in part to the higher oil price assumption.” Translation: All those wind, solar and alternative energy initiatives aren’t likely to prevent the world from thirsting for even more oil in the future. They’ll just temper the magnitude of the increase.

    The driver behind this accelerating demand growth is the industrialization of emerging economies like China, India, Brazil and other Far East countries. Using the U.S. as the benchmark for the industrialized world, the data suggest that the potential future demand for oil is so staggering that the odds of supply keeping pace seem almost insurmountable.

    Consider this: The U.S. economy consumed over 7.5 billion barrels of oil in 2006 to produce $13.1 trillion in gross domestic product. China, India and other developing countries currently use substantially less oil per dollar of GDP, implying plenty of runway for demand growth as emerging economies develop an industrial base and their populations accumulate wealth and consume more goods and services.

    China, for example, uses less than half the crude oil to generate $1 of GDP than the U.S. does. India uses nearly 60% less oil per $1 of GDP than the U.S.

    Oil consumption relative to population also points to further demand growth in developing countries. The U.S. economy and its 301 million inhabitants consumed over 7.5 billion barrels of oil in 2006, while China and its population of 1.3 billion consumed only 2.6 billion barrels. India’s 1.1 billion people consumed just shy of 1 billion barrels. Just wait until the average Joe starts to drive a car in China and India.

    Worldwide supply of oil has been able to keep up with demand, so far. Global production has increased from 64 million barrels per day in 1980 to more than 84 million barrels per day in 2006. Yet the data suggest that, even with advancements in drilling and completion technology, it may become more difficult for supply to keep pace with accelerating demand in the future. American oil production has declined 22% from 1980 to 2006.

    The EIA says Saudi Arabia, the world’s largest producer and home to the world’s biggest oil reserves, produced 10.6 million barrels per day in 2006, little changed from 1980 production of 10.3 million barrels. The kingdom recently announced its intention to increase production capacity to 12.5 million barrels per day by mid-2009. Its ability to do so will be watched closely by those experts who contend that Saudi oil fields either have reached or will reach peak production in this decade.

    The bears argue that high oil prices, changing habits and a weak U.S. economy will result in slackening demand and lower oil prices. Again, consider some facts: in July, the EIA said it expects global demand growth of 1% in 2008, an estimate that includes a 2% decline in consumption by the U.S. The driver? Six percent demand growth from a Chinese economy still generating, in the face of global weakness, 9% to 10% GDP growth.

    While current economic headwinds could batter oil prices and energy stocks around in the short term, be mindful of the big picture: Emerging economies will thirst for even more oil in the future, and the ability of supply to keep up is more questionable than ever. Short-term weakness in energy will yield again to reality, which means a smart investor focused on the big picture can take advantage of energy stocks on sale now at a stock market near you.

    Companies like T-3 Energy Services , Willbros Group , Dawson Geophysical , Carrizo Oil & Gas and Rex Energy are riding a rising tide likely to lift all boats. Don’t get caught in the undertow.

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