StockAnalysis believes that US$40 per barrel oil is history. If we see oil trading below US$50/bbl in the next year or two, it will be the result of a global economic recession. Worldwide, we use four barrels of oil for each new barrel found and the last of the giant oilfields was found 30 years ago.
The carbon economy’s time is ending. New sources of energy and new usage patterns are required. In 10 years time, the thought of designing an automobile to be fuelled by petrol will seem just as ludicrous as does the thought of burning oil to fuel electricity generation today.
The main driver for this sea change in the market for oil and gas is growth of the world’s population, which has doubled to over 6 billion in the past 50 years.
In 2004, US geologist Jean Laherrere went back through the records to find out how much oil was discovered in the Lower 48 States of the US each year.
From the mid 1920s until about 1955, 2 to 4 billion barrels of new oil was discovered each year while production rose from around 1 billion to 2.2 billion barrels pa. By the early 1990s the rate of discovery had fallen to about 100 million barrels pa.
Despite an eightfold increase in the oil price during the 1970s and all the money, technology and equipment available to the industry, this discovery rate continued to decline and has only risen in the past decade in response to some significant oil finds in deep waters of the Gulf of Mexico. Oil production peaked in the Lower 48 around 1971 and has been in decline ever since.
Just as each US state has a similar graph of discovery versus production, Jean Laherrere’s study of the Lower 48 States can be extrapolated to cover the whole planet.
Looking at the world as a whole, we see similar trends pointing to a growing oil deficit. The global oil industry was finding about 30 to 50 billion barrels of oil each year during the 1950s and 60s, but discovery rates have since declined to less than 10 billion barrels per annum while annual production has risen to around 30 billion barrels.
Laherrere’s more recent work shows that global oil discovery peaked in the early 1960s, when about 40 billion barrels pa more oil was found than was produced. Since then the story resembles that of the Lower 48, with annual discovery rates falling well below annual oil production.
Higher oil prices during the 1970s were followed by a small boost in oil discovery, while oil production declined in the early 1980s in response to a fall in demand.
That fall in demand came as a result of a global recession and a steep fall in the oil price resulting from changing usage patterns, involving amongst other measures more efficient and smaller car engines and substitution from oil to gas-fired or nuclear power.
But the Malthusian influence, represented by population growth, soon swamped any attempt at long-term reduction in oil consumption with roughly 200 million new consumers being added to the list every year.
Oil is a very political commodity, which is not widely found where it is consumed and thus involves much trade. Throughout human history, trade, religion and access to resources have been the underlying sources of most human conflict. Today conflict is arising about who controls oil. This issue is not going away and, along with changes in energy technology, will play an increasing role in the price and availability of oil.
StockAnalysis postulates that, about 45 years after global oil discovery rates peaked, the peak for oil production is upon us and thus real oil prices will continue to rise.
The underlying dynamics for oil demand have not changed dramatically so that demand for oil is steadily expanding. From 1998, a boost to demand from a booming, free market China led oil into a physical squeeze which has pushed the price over US$60/bbl.
StockAnalysis reiterates that the long-term trend for the oil price is upward, despite short-term corrections.
Our recommendation is that subscribers should be fully invested in companies that hold significant oil reserves. A scattergun approach is not appropriate since many smaller companies will not gain sufficient traction to stay the course.
Investors should show a preference for those stocks that show long-term growth potential as core portfolio holdings, rather than those that might have some short-term appeal based on speculative exploration work.
Peter Strachan is an independent analyst and author of www.stockanalysis.com.au. peter@stockanalysis.com.au
