Jubak's Journal
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Higher oil prices? It's worse than you think
Several factors will propel global oil prices skyward over the next three to five years. The silver lining? Investors have more time to make money on oil stocks. Here are 5 for the long term.
By Jim Jubak
The daily numbers from the oil markets are bad enough: On Monday, June 13, benchmark light sweet crude broke $55 a barrel on the New York Mercantile Exchange for the first time since April.
But there's worse news for the economy and for any consumer who heats a house or drives a car: Under the surface, the news about long-term trends for oil prices looks even worse. For the next three to five years, the trend is toward higher prices with even greater peaks and valleys.
If I'm right, however, it's still not too late to make a buck on the stocks of oil producers and drillers. In this column, I'll give you my five favorite picks for the long-term. (I gave my picks for the next six months in my column, "5 stocks for a continuing oil rally.")
The long-term news on oil prices breaks down into three areas: - The announced depletion of two major existing fields.
- The resulting rise in political volatility for oil prices.
- The rising costs of finding new oil.
Falling production in the U.K., Mexico
It's too early to say that the folks who predict that global oil production will peak in 2008 are correct. Following the theories of M. King Hubbert, a true iconoclast in the U.S. oil industry who in 1956 predicted that U.S. oil production would peak in 1970, the current generation of peak-oil theorists expect world production will start to decline as the rate at which new oil is discovered falls behind the depletion of proven oil reserves due to consumption. (For more on peak oil, see my column, "Is there fraud in the house of Saud?")
But the peak-oil view has recently received big support from two oil-producing countries in widely separated parts of the world. First, recent government figures show that the United Kingdom, which has been a net exporter of energy for the last two decades thanks to the huge oil and gas deposits discovered in the North Sea about 35 years ago, has become a net importer of natural gas in 2005. A government report projects that the country will lose self-sufficiency in oil in 2009. By 2020, the United Kingdom will import about 75% of its energy. From its peak at the end of the 1990s, United Kingdom oil production has already fallen by about 30%.
Second, a hemisphere away, Petroleos Mexicanos (PEMEX), the state-owned oil company that owns and produces all of Mexico's oil and natural gas, has warned that unless it can gain access to the latest technology for oil discovery and extraction, Mexico could become a net importer of oil within 10 years.
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A good example of the problem is the huge Cantarell field in the Gulf of Mexico, which went into production in 1979. PEMEX says it will start to see oil production from this field, which now produces about 70% of Mexico's crude, start to decline from its current 2.1 million barrels a day sometime in the next few years. Outside experts say the decline is much closer at hand, and the most pessimistic predict a 20% drop production by 2010.
The situations in the United Kingdom and Mexico are examples of the same problem, one predicted by peak-oil theories, but at different stages of development. Oil analysts estimate that the United Kingdom has pumped between 50% and 75% of the available oil and gas in its North Sea fields. The remaining oil and gas is in smaller and more-remote fields that are more difficult and expensive to exploit. Peak-oil theories predict that production from a field will peak and start to fall long before all the oil is extracted, since the more easily pumped oil deposits are extracted first.
Mexico, in contrast, isn't anywhere near running out of oil and gas. Total crude oil reserves (proven, probable and possible) stood at 47 billion barrels at the end of 2004. Proven reserve total 17.6 billion barrels. (By contrast, Saudi Arabia holds the largest proven reserves at about 260 billion barrels.) But reserves are falling because potential new fields are much more difficult -- and expensive -- to find and exploit than Cantarell was.
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