Go to ... Page 1 | Page 2 | Page 3 | Page 4 | Page 5 |

Oil or Not,
Here They Come

By Kevin Bam­brough
Con­tribut­ing Author: Paul Dim­i­tri­adis
Sprott Asset Management

Oil has been markedly absent in the finan­cial head­lines lately. While the recent clamor over EU sol­vency and weak global growth has tem­porar­ily dis­placed its media atten­tion, oil’s cru­cial impor­tance to the world econ­omy has not dwin­dled in the slight­est. Oil remains the world’s great­est sin­gle energy source today, pro­vid­ing over 1/3 of our energy sup­ply. Although it is well under­stood that the oil price is crit­i­cal to the global econ­omy, we some­times neglect to appre­ci­ate how tightly oil sup­ply is cor­re­lated to global growth. By his­tor­i­cal stan­dards, the world has been cop­ing with con­strained oil pro­duc­tion and high oil prices for most of the past six years. This tight­ness in oil sup­ply has been a sig­nif­i­cant fac­tor lim­it­ing global growth, and it would appear that no mat­ter what finan­cial solu­tions are even­tu­ally engi­neered by our politi­cians, global growth will remain sig­nif­i­cantly restricted by the real economy’s abil­ity to pro­duce oil. Lim­ited global sup­ply growth means that the West­ern world now faces sig­nif­i­cant com­pe­ti­tion for oil from emerg­ing mar­kets whose cit­i­zenry are will­ing to work much harder for far less. This will con­tinue to result in a nar­row­ing gap of per capita con­sump­tion between emerg­ing and devel­oped economies as the emerg­ing economies con­tinue to gain rel­a­tive eco­nomic strength, wage growth, cur­rency appre­ci­a­tion and pur­chas­ing power. We believe strate­gic invest­ments in oil pro­duc­ers and ser­vice com­pa­nies will offer an effec­tive way to profit from this trend.

Pro­duc­tion – Where’s the Growth?

We begin with a review of global oil pro­duc­tion. We first wrote about Peak Oil back in 2005; and spec­u­lated that we were approach­ing the pin­na­cle of global crude oil production.1 As Fig­ure 1 below illus­trates, since that time, global oil pro­duc­tion has grown very lit­tle, appre­ci­at­ing by a mere 2% in total pro­duc­tion. This pro­duc­tion plateau gen­er­ated the 2008 oil price spike to nearly $150 per bar­rel. Sub­se­quently, despite the eco­nomic stag­na­tion expe­ri­enced by devel­oped economies, the price of Brent Crude Oil has aver­aged over $78 per bar­rel, four times higher than the ~$18 aver­age that Brent traded at in the 1990s.2

Despite this extremely large and sus­tained increase in price, oil pro­duc­tion has failed to grow mean­ing­fully. Over the past ten years, most experts have con­sis­tently over­es­ti­mated future pro­duc­tion growth and have con­tin­u­ally revised their fore­casts lower as a result. Fig­ure 2 from the U.S. Energy Infor­ma­tion Admin­is­tra­tion (“EIA”) below charts pro­duc­tion fore­casts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil pro­duc­tion esti­mates lower for 2015 and 2020 by 14% and 18%, respec­tively. In light of these down­ward revi­sions, it still seems extremely opti­mistic that sup­ply will increase sig­nif­i­cantly in the com­ing years.

Fig­ure 3 above illus­trates that the Inter­na­tional Energy Agency (“IEA”) esti­mates have been just as inac­cu­rate, forc­ing it to reduce its global oil pro­duc­tion esti­mates year after year.

Go to ... Page 1 | Page 2 | Page 3 | Page 4 | Page 5 |

Read more from the author/contributor here.

Comments

Comments are closed.