Beneficiaries from Oil's Inevitable Upwards Climb

 |  Includes: COP, DVN, DYN, EOG, HAL, JEC, NBR, VLO, XOM
by: Yaser Anwar

Oil has come down quite a bit from its summer highs due to the ease in hurricane fears and partly due to rise in inventories. However, these short-term trends should not sway investors from the bigger picture.

The world now consumes 28.6 billion barrels of oil in a year and that number continues to grow. According to estimates, there are just over 1 trillion barrels of oil left in the world. That's only enough to last another 35 years, as long as we keep burning it at today's rate. With improvements in standards of living in emerging market and third world countries, we will witness increase in oil consumption at homes, for our vehicles etc.

"Discovery is in long-term decline, and spending more money won't increase it,'' says Chris Skrebowski, editor of the London- based Petroleum Review, an industry journal. In its 2005 Energy Outlook, Exxon Mobil said the combined production of non-OPEC countries will peak sometime from 2010 to 2020. OPEC will be able to fill the gap, the report says. OPEC produced about 30 million barrels a day in 2005; by 2030, OPEC would have to churn out 47 million barrels a day. That's almost 57% more than it did last year to satisfy the world's needs.

Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration [EIA]. By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers. The International Energy Agency predicts that global energy needs will surge 30-40% by 2020, and prices will skyrocket if capacity is not significantly increased. Even with high prices, it will be very difficult for world production of oil to exceed 90 million barrels per day within the next 10 years. That's millions of barrels a day short of what the EIA says the world will need in 2015.

We need to build more refineries, find more oil and invest in alternate energy sources. At the same time, we're witnessing an increase in rolling blackouts, surging heating and air conditioning bills and continuous unrest in Middle East, especially Iran as well as continuous attacks on oil workers in Nigeria. Also, don't count hurricanes out even though we've had quite a mild season. So you see, an increase in oil prices is inevitable.

Today was the United Nations deadline for Iran, the number four oil producer, to halt enrichment of uranium, which can be used in the production of nuclear weapons. The UN could impose economic and diplomatic sanctions on Iran, and investors remain concerned that Iran could block oil exports if sanctions are imposed.

As global competition for energy intensifies and tightening supplies leave no room in the system for unforeseen disruptions (such as the recent BP catastrophies), well run oil companies such as Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP), Valero (NYSE:VLO) and Halliburton (NYSE:HAL) to name a few will continue to do well.

Utility companies such as Dynegy (NYSE:DYN) will surge from helping America expand and modernize its aging electric grid, Devon (NYSE:DVN) for its exploration expertise and Valero (VLO) will benefit due to lack of refinery building. The natural gas companies such as Nabors (NYSE:NBR) and EOG Resources (NYSE:EOG) are set to benefit from higher natural gas prices, and Jacobs Engineering (NYSE:JEC) will see a boost due to its infrastructure and engineering expertise.

Disclosure: I don't have positions in any of the stocks mentioned above.