An Inconvenient Truth
The Daily Reckoning PRESENTS: Let’s face it; our planet is facing an energy crisis. If nothing is done to reduce our dependence on crude oil, and if the human race is unable to find a viable alternative source of energy, the 1970’s oil-shocks will look like a picnic. Puru Saxena explores…
ANOTHER INCONVENIENT TRUTH
Most people remain oblivious to the fact that the supply of oil is struggling to keep up with rising global demand. And when you factor in the reality that over 60% of the world’s top oil-producing nations are already past their peak output, the picture starts to cause some alarm. Now, I am not saying that our world is going to run out of oil tomorrow. Far from it! However, the rate at which we pump this stuff out from the ground is likely to enter an irreversible decline.
When painting a rosy outlook for the world’s energy situation, the governments always like to talk about the huge amounts of oil reserves supposedly present in the Middle East. Whether these “reserves” are there at all – or if they have been overstated – is highly debatable. However, what the officials forget is that reserves are not worth much if they cannot deliver oil fast enough. For example, I may claim that I have discovered a trillion barrels of oil under my backyard, but how helpful is this reserve in solving the world’s energy problem if it only produces say a hundred thousand barrels of oil per day? In a world where the global demand for oil is running at 84.5 million barrels per day and supply is extremely tight, rather than taking comfort from the Middle-Eastern oil-reserves, we must focus on the amount of oil that we can actually bring to the market.
Moreover, in order to grasp the world’s oil supply dynamics, it is crucial to understand that every oil field or oil-province on the planet is governed by the laws of geology. In other words, once you have extracted more than 50% of the oil present in any given field, the rate of production peaks and thereafter enters a decline. This is what geologists refer to as “Peak Oil”. Now, some would argue that this is a conspiracy, but a quick look at some historical data proves that “peak oil” is a reality; an inconvenient truth!
There can be no disputing the fact that the United States’ oil production peaked in the early 1970’s and today its output is roughly 50% below its record-high. In other words, despite all the amazing technology at its disposal, the world’s most “developed” nation, has failed to ramp up its oil-production and now imports roughly 65% of its oil. So, if “Peak Oil” is indeed a myth or a conspiracy and if new forms of technology will surely help us find and produce an unlimited quantity of oil, why then, has the most technologically advanced nation failed in this “easy and simple” task? Simply, it does not exist.
Next, let us turn to Saudi Arabia. It is interesting to note that despite their highly- advertised reserves of 270 billion barrels, Saudi oil production has in fact fallen since 2004 and is still below the record-output achieved in 1981. It is not as if the Saudis do not have an incentive to produce oil when it is trading above $60 per barrel. So, you have to wonder why the Saudi’s have failed to maintain let alone increase their oil production.
It is no secret that all of the “super-giant” oil fields in Saudi Arabia were discovered several decades ago and are very mature. Some geologists claim that these oil fields are now in a permanent state of decline and the national oil company (Saudi Aramco) is taking desperate measures (injecting massive quantities of water) in order to maintain the pressure in their oil fields. If this assessment proves to be correct, we are in trouble.
Over in Mexico, the news is also ominous. It was recently announced that its largest oil field (Cantarell) peaked in 2004 at 2.15 million barrels per day and since then 600,000 barrels of oil per day has been lost due to the inevitable “peak”. Today, Cantarell (the world’s second largest oil field) produces only 1.5 million barrels of oil per day; a sharp fall in a short period of time! Over the coming year or two, Mexico expects to lose another 500,000 barrels per day of oil production as Cantarell’s decline accelerates.
In Asia, the picture also looks gloomy. DaQing, China’s largest oil field is also past its peak output, which means that the world’s most populated nation will have to import even more oil in the future.
Declining production from existing oil fields in different parts of the world would not have been worrisome if we were still discovering gigantic oil fields in new frontiers. However, it is my observation that over the past 35 years, only a single gigantic oil field has been discovered anywhere in the world (Kashagan Oil-field discovery in 2000). Furthermore, it is worth noting that due to rising costs and technological difficulties, its production will only commence in 2009 and peak output may reach 1.5 million barrels per day – a drop in the ocean.
So, the point I am making is that even if we were to discover a world-class oil field today, the supply from that will probably not reach the market for another decade and we will need to find many oil fields to feed the rapidly rising global demand. To complicate matters further, over the coming years, it is expected that more and more existing oil fields will enter a decline. So, rather than adding to the global supply in any meaningful manner, additional supplies from new fields may only just about compensate for the decline in the older fields. This is a sobering thought often overlooked by many oil-analysts and economists.
In any market, it is pointless to only look at supply without examining demand, so let us review some of the trends in this area. Despite elevated prices, the global demand for oil is at a record-high. So far, “high” prices have not had any impact on curbing demand. Although demand from the industrialized nations has declined somewhat, the emerging-world, led by China and India, has continued to consume ever-larger quantities of oil. Going forwards, it is expected that roughly 500 million Asians will migrate areas to urban centers over the coming decade and this will continue to increase the demand for crude oil.
Today, the average American uses roughly 25 barrels of oil per annum, whereas the average Chinese uses a miniscule 2 barrels per annum and the average Indian burns less than a barrel per year! Some of the more developed Asian nations such as Hong Kong, South Korea and Japan consume roughly 17 barrels of oil on a per-capita basis. It is worth noting that despite extremely low per-capita consumption levels, today China and India combined, consume 11% of the world’s crude oil versus 6% at the start of the decade! If current growth rates continue over the next decade, we would require an additional Saudi Arabia to fulfill this demand.
Now, my research has convinced me that there is no other Saudi Arabia waiting in the ranks to meet the rising Chinese and Indian demand. Moreover, if my assessment is correct and the global supply of oil is unable to appreciate by much from the current levels (84.5 million barrels per day), we will see a significantly higher price of crude oil. Ultimately, if nothing is done to solve this problem, we may see shortages and rationing of the world’s most important natural resource.
for The Daily Reckoning
June 6, 2007
Editor’s Note: Dan Amoss recently told his Strategic Investment readers:
“The world’s largest oil field is in Saudi Arabia. It’s called Ghawar. It pumps out about 5.5 million barrels a day – 60% of Saudi Arabia’s entire output. At least that’s what the Saudis say. But again, they won’t let anyone confirm that.
“As it turns out, they might have good reason.
“Word is getting out from sources inside Saudi Arabia’s oil industry that Ghawar’s real production might be only 3 million barrels a day!”
By pinpointing specific companies best positioned to thrive during these difficult times, Dan’s readers are poised to profit in what he’s calling ‘The New Energy Crisis.’
Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.
The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary’ investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise “Email Updates”, which are sent out when an important development in the capital markets warrants immediate attention. Subscribe Today!
This morning…our fingers froze at the keyboard. We were suddenly struck by an irony so immense we could scarcely breathe, let alone type. Or else it was a hangover. We had to loosen our collar…sit back…and relax for a minute.
The world seems to be in the grip of three immense frenzies at once, we realized. Each one is breathtaking. Each one is awe-inspiring. And each one is a monumental humbug. Each part of this hysterical trinity has tres partes of its own – in other words…one part truth…one part lie…and one part complete absurdity. And each one supports the other, reinforcing one delusion with another, even bigger one.
In the New World, a recent poll showed that Americans thought the war on terror was the single most important issue on the planet. While back in the Old World, a similar question drew a different reply: It is global warming that the Europeans worry about. Meanwhile, all over the world, from Manchester to Mandalay, everyone believes he can get rich without working; all he has to do is to buy a financial asset and watch it go up in price.
It is this last fantasy that interests us most, here at the Daily Reckoning headquarters. Every sentient being on earth seems to have come to believe that it is money that matters most…and the way to get money is to speculate. Asset prices only go up, he believes. And each one believes he has some special gift that permits him to choose the one that goes up most. Seeing neither error nor risk in this proposition, he then proceeds to leverage himself – borrowing money either for consumption (Americans) or speculation (Chinese) so that he can take advantage of it.
What results is a huge splurge of spending – on consumption in North America…and capital investment in Asia. This frenzy of activity, of course, brings about a huge increase in the consumption of resources – notably oil.
The biggest single user of oil in the world is the Pentagon, whose newfound mission is to maintain order throughout the planet so the oil continues to flow. Every army since 1914 has two major objectives: to protect the homeland…and to preserve its access to the number one military supply – oil.
(Byron King has been searching high and low for the best energy stocks as this global oil grab continues – and he’s detailed them in his inaugural issue of our latest newsletter, Energy and Scarcity Investor.
Meanwhile, a hypothesis has conveniently arisen: Increased usage of fossil fuels raises the worlds CO2 levels…trapping heat. The authorities, naturally, rush to ‘save the planet,’ conveniently alarmed by the plight of polar bears and penguins. How can they help? They can raise taxes! Yes, global warming is to be remedied by a global tax on fuel, so as to raise prices and discourage users. Who will collect and redistribute the tax? If you guessed the Girl Scouts or the Kiwanis Clubs you are a naïve moron. The tax will be collected by governments, the largest of which is also the largest user of fossil fuel…and the greatest contributor to the alleged danger.
But we will leave that insight to simmer on your stove, dear reader, and return to the worldwide financial bubble.
A number of analysts whom we admire and respect – Jeremy Grantham and Richard Russell, for example – have come to believe that we are on the threshold of an even greater bull market.
We have noticed how one bubble has led to another…in stocks…in real estate…in art…in watches and collectibles…in one market…then in another…until the whole financial world is expanding at an alarming rate. We read in the paper, just yesterday, that the celebrated art promoter Damien Hirst has created a diamond-encrusted skull now apparently offered for sale at $100 million. Pity the poor dope who buys it! But what do we know; it will probably go up! And now you can buy stocks in China for 40 times earnings…and houses priced over $100 million too.
We have noticed also how reckless spending, borrowing and money printing in the United States now leads to reckless investing, borrowing and money printing in other countries, as each central bank tries to keep its own currency from going down faster than the dollar…and how the financial industry has invented new ways to increase liquidity and leverage, effectively reducing central bankers’ control over the marketplace.
And now it seems that the whole world is enjoying a Super Bubble…unlike anything ever seen before. It really is a New Era, in other words. How big will it get? How long will it last? We wish we could tell you…
Everyday is a new day…and every day is just like the one before. Every market is completely new…and not so different from ones that came before. Every generation prepares the way for the next one (about which…more below…)
Addison Wiggin, reporting from Baltimore:
“All the major US indexes fell yesterday, from the Dow to the Wilshire 5000.
“Mainstream analysis of the sell-off goes something like this: Ben Bernanke told the world that the U.S. market is on a path of “moderate growth.” But, many investors have been betting that the economy’s lackluster performance in the first quarter 2007 would inspire the Fed to cut rates. Moderately encouraging words from the Fed chief yesterday mean no rate cuts on the horizon… investors get spooked and head for the exits.
“We think, with the Dow and S&P making news almost daily of market highs, investors are just nervous and want to take profits. Any excuse will suffice.”
For more insights into today’s markets, see The 5 Min. Forecast
And more thoughts…
*** The U.S. economy is now growing at a rate that is less than the rate of population increase. If it keeps growing at this rate, in other words, we’ll all go broke.
Housing corrections take a long time. There are now 700,000 new houses for sale…and more houses for sale, overall, than any time in history. It will take years to work down this inventory, because sellers typically resist price cuts…as long as they possibly can.
Money Magazine has done a series of “Scenes from a Bubble,” referring to the housing bubble:
“MONEY has obtained more than 100 emails and faxes sent by loan officers to appraisers across the country. The language varies from asking if a predetermined value was possible to promising more business if a number could be hit.
‘”Many homeowners are finding out that the equity they were led to believe they had in their house is not actually there,’ says John Taylor, president of the National Community Reinvestment Coalition.”
MONEY took an example. Mr. Kim obtained a no-money-down $642,000 mortgage, based on an appraiser’s estimate of the value of his house. MONEY’s own appraiser judged the place worth only $580,000.
The result: Kim now owes $62,000 more than his house may be worth. How many people are in that situation? We don’t know…some of our dear readers could be in that situation – and not even know it.
How long will it take them to reckon with it? We don’t know that either. How did they get in that jam? That, we do know. MONEY continues:
“Wall Street’s rocket scientists keep finding more sophisticated ways to repackage and resell mortgages. As a result, lenders stopped worrying so much about credit standards and learned to love risky loans.
“Now a lot of that lending looks foolish. Mortgage delinquencies among so-called subprime borrowers have risen to 13 percent, the highest in at least 10 years. The market for the lowest-credit-quality mortgage bonds has tanked. And investors in CDOs may be in for a rude shock.”
Meanwhile, yesterday, yields on the long bond – closely linked to mortgage rates – rose to 5.06%. Not good for the housing market.
*** Modesty is our only virtue here at the Daily Reckoning headquarters. And even as to that, we are insincere. Meaning…we are so proud of being modest, we are almost arrogant about it.
But occasionally modesty pays off. Two years ago, we were convinced the world was going to hell in a handcart. But we decided, nevertheless, to make a small contrary bet – just in case we were wrong. We made a ‘hedge against prosperity’ gamble – by putting a little money into a handful of very risky new-technology companies (about which we knew nothing…but a friend had a portfolio of them). We have not looked at it since…but, with all this speculative dust swirling around, it must be doing well. We’ll give you an update.
*** Finally, our son Jules came back from college. He brought with him two things we didn’t know he had – a girlfriend…and a new CD. As to the girlfriend, we still know little. She lives in another part of town; we haven’t met her yet. But he sang for us one of the songs on the CD that he had composed himself. It was so sweet…so pure…it brought a tear to our eyes.
“You know,” Elizabeth commented afterwards. “Some things you can’t achieve in a single generation. You might like to have written songs yourself. I can sort of see you doing it…if you had any talent. Just teasing, dear. But one generation sets up the next. Jules plays the guitar because you and Thom showed him how.
“And he can now focus on it more that you could, because he doesn’t have to worry about where his next meal is coming from. He’s not dirt poor the way you were…because you’ve worked hard to make some money. So now he can do something you couldn’t. You’ve spent your whole life focusing on money…not just how to get it yourself, but how others get it…how it works…and so forth. Economics…investments.
“Well, Jules isn’t interested in money at all – probably because he doesn’t have to be. He’s interested in music. But that might not have been possible if you hadn’t been so interested in money. And now Jules allows both of us a way to live more than we could on our own…to live a life we couldn’t live…to be something we couldn’t be…not exactly vicariously, but genuinely, because we contributed to it in so many ways. I guess that’s why people have children…not only because they make their lives richer, but because they make themselves richer, if you see what I mean. Every mother wants her son to grow up to be a doctor or be a president, because – in some indefinable way – she becomes one too.”