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Trading Lessons

Peak Oil Is Coming, Courtesy of Political Incompetence

Commodities / Crude Oil Dec 30, 2010 - 11:57 AM GMT

By: Graham_Summers

Commodities

Before starting today’s essay, I have to thank Rick Rule of Global Resource Investments for his insights on the following issues.

Rick has been involved in natural resources investing since 1974. He founded Global in 1994 and has been behind many of the largest deals (Silver Standard being one) and the largest profits (between 1998 and 2006 he grew $15 into $460 million) the industry has ever seen.


I spent the better part of a recent morning discussing oil and the energy sector with him over the phone last week.

“Most people believe that most oil in the world is produced by the big oil companies, the Exxons, the Shells, the BPs, the Totals of the world,” Rick began, “That is not true. Most oil in the world is produced by national oil companies… companies owned by the state or government.”

I asked Rick what percentage of world oil production is controlled directly by governments. His answer: “at least 70%.” Rick went on to explain that this creates a situation similar to the Peak Oil theory based not on lack of resources, but lack of competence on the part of political leaders.

“Much of the cash flow generated by these state owned companies is spent on government spending programs. Now, oil and gas are capitally intensive businesses. If you do not continually reinvest, you impair your ability to produce.”

“It is my opinion that this lack of reinvested capital will create a situation in which it is inevitable that in five years the world supply of export crude from several key exporting countries will be greatly constrained of not stopped altogether. Those countries include Mexico, Venezuela, Peru, Ecuador, Indonesia and perhaps Iran.”

According to the International Energy Administration worldwide demand for crude oil imports is growing at a rate of 1.5-1.6% a year. When you combine this growth in demand with a major cut in 20-25% of world exports you have makings of what Rick calls, “a MAJOR price dislocation.”

This is something I’ve yet to hear anywhere else, especially in the mainstream media. All talk of higher oil prices that I’ve seen focuses on speculation on Wall Street (true), the view that the world is running out of oil (false), or the view that war in the Middle East will disrupt supplies (probably will be true). Nowhere is anyone talking about a cut in exports due to government misallocation of resources.

I asked Rick if his “price shock” forecast was a certain thing. He responded, “There is one potential solution which may or may not work. The Gulf States, most notably Saudi Arabia, Kuwait, and Abu Dhabi, are aggressively reinvesting in building production capacity. The issue is whether or not they can expand capacity enough to shelter the shock of the decrease in exports coming from the other countries I listed before.”

So the one group that could stop a spike in oil prices is the Middle East?

“Yes, paradoxically, the people who talk about supply issues in the US are concerned about the very nations that are our most reliable suppliers: the Persian Gulf countries.  The Saudis are spectacularly reliable suppliers. They have invested tens of billions of dollars maintaining a surplus capacity of two million barrels per day specifically to level out price shocks. This suggests to me that American consumers have been massive beneficiaries of a region that they are being taught to dislike, namely the Middle East.”

Combine these insights with recent comments from a former Shell Oil executive that gas will be at $5 per gallon by 2012 and you’ve got a serious argument that energy prices will be soaring in the future.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. If you’re getting worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what’s to come.

I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com and click on FREE REPORTS.

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2010 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Graham Summers Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

David Baran
31 Dec 10, 11:32
Peak Oil is coming . . .

What about your neighbour Canada? Did you forget? Canada is the biggest, best neighbour the US has or will ever have! Exploration is `exploding` in Canada. What effect will this have on oil reserves? It appears that you forgot about this source of oil. Luckily for Canada China and many other countries want our oil. So, guess what, there will be enough oil but not necessarily for you!


Alex
01 Jan 11, 16:30
Shale Gas

Peak Oil?

Venezuela has the biggest oil reserves in the world so I cant see how oil production is going to stop in 5 years time?

Even if it was true it doesnt matter anyway. Convert your car to gas (as opposed to petrol)


kenneth
02 Jan 11, 22:39
peak oil

the above comments lead me to believe that people really don't know what peak oil is all about. it's not about how much oil is in canada or venezuela, but the rate oil can be produced. it matters not if there are 1,000,000, 000 barrels left or 5,000,000,000, what matters is how much can be produced daily, if most of the cheap oil is gone then you have to resort to harder to find, and harder to produce alternatives like the above mentioned. that slow the rate of production thus oil shortages, a liquid fuel problem, food, and transportation problems, a logistical nightmare.


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