We really don’t know as much about the oil market as we think we do.
There are many numbers out there, but most of these involve a lot of guesswork. For example, we really don’t know just how much oil the world will need. The US Department of Energy says we’ll need 106.6 million barrels a day by 2030, but how does it know? It can’t know. The DOE can’t know what the world will look like in 2030.
We don’t really know how much oil we’re discovering or how much will actually come to the market any time soon. We don’t really know how much it will cost to get this oil.
We can guess, but our guesses are frequently wrong. Goldman Sachs wrote in a research report issued in February of last year (230 Projects to Change the World) that the cost of bringing on additional oil sands project would come to $80-$90 a barrel. It sounds nice, but it’s a guess.
We don’t know a lot, even though we put decimal points on lots of numbers as if we knew precisely. And there is plenty of room for people to fudge numbers and make up stuff. It happens all the time.
Of course, no one knows what the price of oil will be, but there is no shortage of forecasts. Goldman Sachs says it will be $95 by the end of 2010. Deutsche Bank says $65. They are all guessing.
There is one thing we do know. And fortunately, this is the most important thing to remember as an investor in oil: The market is still pricing proved oil reserves at less than replacement cost.
In other words, it is cheaper in today’s market to buy proven reserves in the stock market than to drill for new ones.
I would cite the 2008 reserve and finding cost study published by Howard Weil. It shows the average cost of reserves through the drill bit is about $43 per barrel, with the median (or midpoint) around $25 per barrel. These are hard numbers, not soft guesses. You can do this yourself and find out how much it costs for your favorite oil company to add a barrel of proved oil reserves by drilling for it.
So we have a good idea of what it costs to create a barrel of proved oil reserves today. Figuring out these numbers is easier than guessing what the price of oil will be in the future. Granted, even these cost numbers will change. There are no constants.
But here is the trick. You want to buy oil companies when you can pick up proved oil reserves for a lot less than what it costs to produce them. In the market, that’s where we are today. In fact, you can pick up proved reserves for less than $15 a barrel.
You have lots of companies in which you can buy oil in the ground for under $10 a barrel…and remember it costs an average of $25 a barrel to replace it.
I could not make a more compelling argument for oil stocks than this.
Buying for less than replacement costs is one of my main compasses in investing – whether I’m buying potash mines or gold mines or factories or oil rigs or what have you. If I can buy something in the stock market for less than it costs to replace those assets – and as long as I’m not buying buggy whips – then I’ve got a good chance of making money.
That’s because the stock market is, after all, just a market. Eventually, prices correct. In the oil market, we’ll see more acquisitions. It’s cheaper and easier to grow reserves that way. The buying pressure will lift the price of oil stocks so that the disparity is not so great. Simple as that.
In the case of oil, we are also looking at strong odds that the costs of producing a barrel of oil reserves will go up. Recently, The Wall Street Journal ran a piece titled, “Cramped on Land, Big Oil Bets at Sea.”
Now, you’ve probably heard of all the big deep-water oil projects. All the major oil companies are moving farther offshore in their quest for oil. The WSJ article leads with this: “Big Oil never wanted to be here, in 4,300 feet of water far out in the Gulf of Mexico, drilling through nearly five miles of rock. It is an expensive way to look for oil.”
Yes, it is. This is another of the great unknowns. We don’t know how much it will cost at the end of the day to get this oil. We know that it will cost a lot. Chevron spent $2.7 billion over 10 years on just the first phase of a deep-water oil project in the Gulf.
That’s one of the more tame projects. Some of the sub-salt discoveries involve drilling more than 30,000 feet. They will be the most expensive wells ever drilled. You really don’t need to know a lot about geology or oil to guess that this deep-water oil is going to be more expensive than the good old oil wells onshore.
So the average cost of reserves is likely to go higher. Meaning that if you can lock in quality, low-cost, long-lived reserves today for only $15 a barrel or less – you should do it. That’s why you own oil stocks today.
Most of the major oil discoveries that remain to be found in the world will be offshore, in deep water. The other day, I attended a spirited session at the annual convention of the American Association of Petroleum Geologists concerning deep-water energy development. The always-ebullient Brazilian geochemist Marcio Mello — CEO of Brazil’s HRT Petroleum […]
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
Yep lets get those speculators in the game and that will help prices.
Please don’t give us a T-bone without any fries!!! What oil stocks??!!
Oil in Israel! In Genesis 27:28, Issac blessed Jacob (His name was changed to Israel) with the “FATness of the earth”. In Genesis 27:39, Isaac blessed E’sau with the “FATness of the earth”. They were both blessed with Oil(FAT) by Issac. E’sau’s descendants have already received their abundance of oil, but Jacob(Israel) has not received oil yet, although it is predicted to happen. If there is any doubt about Israel getting oil, there is a book of scriptures by James Spillman titled “The Treasures of The Deep” that even predicts the location where the oil is located. Something to think about. Anson
Anson, if you get Billy Graham to join in; I’m with you. My guess is that you won’t since you’ve been duped into believing something that isn’t true.
Pingback: canewise basiotribe alkaid()
Pingback: zobacz tutaj()
Pingback: e cigs reviews()
Pingback: what is raspberry ketone()
Pingback: free electronic cigarettes()
Pingback: casino bonus ohne einzahlung()
Pingback: electronic cigarette free shipping()
Pingback: skup zlota()
Pingback: poker bonus bez depozytu()
Pingback: kasyno online bonusy bez depozytu()
Pingback: e cigarette free offer()
Pingback: puerto vallarta weather()
Pingback: raspberry ketones reviews()
Pingback: How To Conceive A Girl()
Pingback: book of ra gratis()
Pingback: garcinia cambogia 1500mg()
Pingback: ĀTRIE KREDĪTI()
Pingback: STD Testing()
Pingback: swiss casino bonus code ohne einzahlung()
Pingback: dukan diet meal plan vegetarian()
Pingback: work from home()
Pingback: selena gomez fotos sin ropa()
Pingback: Best Way To Get Pregnant()
Pingback: goldsmiths games()
Pingback: click here()
If you’re just tuning in, we’re two parts deep into our three-part conversation with Richard Duncan. Part III continues with talks on globalization, deflation, quantitative easing, the dollar crisis and more. Read on...
Modern anesthesia makes critical operations possible that few humans could survive otherwise. But according to a new study published in the journal Geophysical Research Letters, some of the numbing agents we breathe may also be significant contributors to global warming.
Look, we ain’t gonna see $100 oil anytime soon. That's great news for businesses guzzling a lot of fuel. Operating costs are way down, which means higher profits. And higher stock prices. And yes, you can still find plenty of great opportunities to book profits as companies save money on fuel…
If you missed it, we featured Part I of a conversation we had with our friend economist and author Richard Duncan yesterday. Today, Part II of our conversation with Richard Duncan continues. Read on...
This past Monday, we had a long conversation with Richard Duncan encompassing his perspective on how capitalism has died… Read on for Part I of our conversation with author and Macro Watch publisher Richard Duncan...
Nuclear power has been hammered since the Fukushima disaster in Japan four years ago. But as Greg Guenthner explains, nuclear power is making a comeback as countries around the world appreciate its great potential. He’ll also tell you exactly how to play this trend.