Important Facts and Background on Oil & Gas
Before anyone invests in oil and gas, they need to understand several important facts and the big picture about the industry and the product. It would be impossible to cover all of what you would need to know on this website. However, I have summarized important points here and will be happy to discuss the information more thoroughly. My book, Investing in Oil & Gas: the ABCs of DPPs covers many of these subjects in more detail.
I. Oil is entrenched in our society and world. Just a few facts to consider:
- You know the most common products derived from petroleum are gasoline, heating oil, and diesel fuel. However, did you know that items such as eyeglasses, soft contact lenses, aspirin, tires, footballs, milk jugs, ink, crayons, bubble gum, dishwashing liquids, telephones, linoleum, pvc pipe, polyester & rayon fabric, floor wax, deodorant, roof shingles, heart valves and computers are also made from petroleum? And there are thousands more items used in our everyday life on that list.
- Did you know that one barrel of oil has as much energy as twelve people working full-time all year, says Roscoe Bartlett, a scientist and U.S. Congressman. This is the kind of tremendous strength and inherent energy that oil has, and the source of how world economies and industries have grown over the last century.
- Did you know that it takes 10 calories of energy from oil to produce every one calorie of food we eat?
- Consider how oil allows us to easily we move from continent to continent and across the country; consider the amount of consumer products that are shipped at distances due to oil; and consider how many people in their everyday life are dependent on their car for transportation.
II. Supply – Demand and Peak Oil
The World Energy Outlook is produced annually by the OECD (Organization for Economic Cooperation & Development) and is an authoritative source on trends. The 2007 Outlook reports that the United States demand for oil is expected to increase 30% and natural gas by 50% over the next 20 years. However, U.S. domestic oil and gas production is declining at 4% to 6% per year. The same report says that world energy consumption is projected to increase 57% from 2004 to 2030. Total energy demand in non-westernized countries is projected to increase by 95%.
American dependence on oil has grown from 10% in 1970 to 65% in 2004, and the numbers are estimated to be at 69% now. The annual U.S. per capita consumption is 25 barrels, as opposed to Japan at 14, Britain at 11 and China at 2 (and growing). The world consumes oil at a rate of one thousand barrels a second, as Peter Tertzakian wrote in his book “A Thousand Barrels A Second”. (McGraw-Hill 2007).
The following chart, used with the permission of WTRG Economics, shows the growing demand, consumption and pricing of petroleum since 1973:
The five largest global oil producers are Saudi Arabia, Russia, the United States, Iran and China. Even though the U.S. is the 3rd largest producer, it is producing less and importing more so is a net oil importer – like China.
During 2006, according the EIA (Energy Information Administration), the five largest suppliers of crude oil imported to the United States were: Canada (17.2%), Mexico (12.4%), Saudi Arabia (10.7%), Venezuela (10.4%) and Nigeria (8.1%). 2007 was almost identical, with Saudi Arabia moving to the number two spot ahead of Mexico.
Peak Oil
The world and the U.S. has a steady and growing demand for oil, but what about our supplies and availability in future, and what about global supplies? The late Dr. M. King Hubbert (1903-1989) became famous for his work on world oil supply. His study, first presented in 1956, became known as Hubbert’s Peak. Essentially, his bell-curve analysis indicated that our U.S. conventional crude oil production would go over the top of a great curve in 1970 and start downwards, which has actually proven true. He was initially ridiculed by some when the reports came out; however, the facts show we never produced more oil than we did in 1970. An example of Hubbert’s Peak is found below, compliments of Ronald Swenson (www.oilcrisis.com):
The following chart compliments of James Williams and WTRG Economics shows U.S. production since 1973.
I am pointing this out in light of supply and demand. As you can see, we rely on more imports to feed our oil thirst every year, even if our consumption remains constant – which it has not. However, just as the US oil production has peaked, world oil production itself will eventually peak as well (some say we are there). There are reports that large fields in the Middle East, such as Ghawar (the largest field in the world) has peaked; certainly oil from the North Sea has peaked as well as reports from many other areas. As it stands now, the demand is not at a plateau or lessening – it is growing. Alternatives have not yet been developed on a wide scale to help ease the situation, either. There are less new finds of oil, and the oil that is found is either harder and more expensive to extract or it is of lower quality/grade.
If the U.S. made a decision to open up the Arctic or areas of the Gulf of Mexico to drilling to address the issue, it would likely take 7 years or more (some say 10 years) for the consumer to see the results of those actions. And this wouldn’t account for replacing depletion on existing fields. Consumers and investors need to realize that there may be interim short-term solutions, but due to our entrenched reliance on and use of oil, we are vulnerable to its increasing price and lessening supply. These facts are good for an investor (high prices, demand for a necessary commodity which is finite), but not good for the general consumer. It will become even more precious /expensive as the world’s supply decreases because so much of the existing infrastructure relies on oil.
After reading this short summary, you might be thinking that if oil is running out, why invest? For several reasons: oil is not disappearing in the next 5 or 10 years. But hopefully you can see how the price could stay relatively high with a commodity in such demand. Many experts believe that long term prices will remain around $100 per barrel, with fluctuations up and down.
Natural Gas – the quiet cousin of oil!
Natural gas is a cleaner fuel, and we have good supply domestically along with new finds or ‘plays’. We only import about 19% at this time. Newer technology has allowed us to extract gas from ‘tight’ areas (such as the Barnett Shale, Woodford Shale etc.) and there is a good existing infrastructure domestically. However, we need to remember that natural gas is a finite fossil fuel, and many of the same facts and risks about oil apply to gas as well. One difference is that natural gas currently tends to be cyclical – it is more expensive and in more demand in the winter and summer months, less so in spring and fall, unlike oil. Hence cash flows in a gas investment will reflect that.
For more details, please contact Kathy.
This is not an offer to buy or sell any security. Securities are only offered by PPM to accredited investors. Investments are highly speculative, subject to up-front fees and expenses that may impact investor returns and outweigh the tax benefits, are generally illiquid, the stated investment objectives may not be met, appreciation and income are not guaranteed and there is the potential for the loss of principal invested.