By: Ken La Rive
Sure, there are oilfield questions I can’t answer. However, here is one I can. Why can’t we get the price of a barrel of oil down? Here is why: Demand is growing a lot faster than we are able to supply. Simple? Not really.
Anyone who has ever taken an economic course knows from the first week of lectures that cost is proportional to supply and demand. Statistics seemingly vary, depending on the source, but my reading of oil and gas journals all agree that we are using up our natural resources faster than we can find and produce. Justin Pettett’s article entitled “The real value of oil and natural gas?” published in “The Anglo Far-East Bullion Company” newsletter in July 2004, states what others have said long before: “From an investor’s perspective it’s simple economics, supply and demand. Position yourself in a market where the demand outstrips the supply daily, and you can’t loose.”
With this said, lets throw something up in the air. Pettett states that the US oil market produces 8 million barrels of oil per day. We, America proper, consume over 19 million barrels per day, and so must find 11 million per day just to keep up with demand. This is 26 percent of world production! Trying to absorb this is staggering! We are talking about a big world here. How can this be?
I’ll tell you. Anyone who has traveled knows that most people in the world are poor, according to our standards. Most will never be able to own a motorcar, and some may not know any peers who do. A large percent use coal oil to heat and light their homes. A sickle on the end of a human arm is the way to cut grass, and wading in mud for twelve hours a day is the way to plant and harvest rice. Riding a bike is the main way to get from point A to B. In China for instance, who is the fastest growing economy in the world, the populous is slowly making the transition from bicycles to mopeds. Off-Note* It is my understanding that the average farmer in China have recently been brainwashed and hooked by the tobacco industry to spend more on cigarettes than food and clothing combined, with some using 50 percent of their earnings to buy tobacco products…sorry to change the subject, but somehow I find this significant…
To get back on track, investors are telling us more and more that there is no better time to invest in the oilfield. Though we have seen some large price fluctuations in the past, higher prices are here to stay. Recently prices were in flux by the factors of Enron, the hurricanes, and speculation of terrorist attacks after 911, but all have had a marginal, even a minimal effect. The primary one is that there just isn’t enough crude to go around!
Looking at prices for over twenty-five years, I have seen 40 dollars to 10 dollars a barrel for Louisiana Crude, and now recently, over $50. We are led by some to believe that if Saudi just opens its spigots wider it will flood the market, bringing prices down. Wonder why this hasn’t happened? I can tell you emphatically this can’t happen, not any more. For one thing, OPEC controls only about 40% of the world’s production. Saudi is at peak production, and the artesian oil they were so noted for in the seventies are having more saltwater in the ratio than ever before. I know that they are trying to produce more natural gas, to fill in this gap, but I’m sure they would deny this. I was on one of those jobs just last year, and it is my understanding that some major oil producing wells of their illustrious past now have a 50/50 oil water ratio. Also, the threat of terrorist attack is imminent, protection expensive, and this taints financial speculation as well. The bottom line here is that they are at peak production, and there is no large finds of this magnitude to be found since the middle 60s.
L.B. Magoon with USGS wrote in the AFBC newsletter: “Whose fault is it? Who’s holding out? Nobody, just like the buffalo and the fish in the sea, they are just less plentiful. Same with oil, there is a limit to how much oil the world can produce every day. We are not running out of oil, it is just becoming more precious.”
Well, I see his point here, but it isn’t a just comparison. For one thing, fish and buffalo can be replenished, but oil can not, at least not for another 165 million years. Unless we can find an alternative energy source, and I mean soon, before the year 2020, life in America will become very expensive. Investment companies are urging their clients to buy into energy, a tangible asset, like gold, silver and platinum, which will grow off the charts. It is those who sell, not those who buy, who will win. It will be a seller’s market, and you can take that to the bank!
Final note: In the grapevine I have heard that Mexico has had a giant find in their deep water sector. They are reluctant to relinquish control of this find to anyone but PEMEX, wanting to keep revenues within the Mexican Government. In my mind this will be great for North America, as we will have a fresh source, and Mexico’s economy will surely flourish, taking some of the pressure off of our borders. If in fact this can be believed... I have worked with Mexico, and sometimes the truth is wrapped in bureaucratic red tape. I suggest not buying any stock just yet, but keep your eyes open. I know one company who is a sure bet in the world market, but for the life of me I’d rather starve than buy stock in tobacco…