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Most of the heads of the larger oil companies don’t speak out much about the concept of Peak Oil. If they do it is generally to assure the world that there is plenty of oil to go around for many decades to come.

I don’t know if they honestly believe that or are doing so in order to make sure we don’t do something radical that allows us to transition away from their product.

If they do honestly not think that Peak Oil is upon us I would be surprised. There should be no group of people who understand better that finding new oil is exceptionally difficult. Every year they do everything they can to grow production and reserves. And they can’t seem to do it. This lack of growth is happening despite a willingness to look for oil in increasingly dangerous, remote and expensive locations every year.

I recently went back and read a recap of an address from Hess Corporation (NYSE:HES) CEO John Hess. Hess has a much different public view on the challenges the world has ahead of it.

$140 Per Barrel 2008 Oil Price

At the time of his address in 2009 oil was back down in the $70 range as a result of the financial crisis which temporarily wiped away 2 million barrels per day of oil demand. Even at this time Hess considered that the $140 per barrel reached in 2008 was not an aberration, but rather a warning.

Hess presciently suggested that once economic growth recovered that it was likely that the oil market would return to the conditions of 2008. We haven’t quite gotten there, but global oil prices haven’t been that far off for most of 2011 (remember WTI crude prices are the exception not the norm).

One thing that I’ve found very interesting in 2011 is that even with Brent crude prices ranging between $110 and $120 for much of the year the world doesn’t seem overly concerned with this price level. Five year ago $70 oil had everyone in a tizzy. Now we barely blink at $100 oil

Hope Is Not a Solution

Like me, Hess is skeptical of claims made by other oil industry executives that suggest that the industry can meet the challenges of producing enough oil to meet demand. Hess thinks hoping that the industry is up to the task is not good enough.

Hess also pointed out that given that it takes 5 to 10 years between discovery of oil and actual production the world needs to act immediately to avert an oil crisis.

He also believes that the world needs to face these facts:

Fact No. 1: Eighty-five percent of the world’s energy comes from hydrocarbons. While renewable energy will be needed to meet future energy demand and contribute to reducing our carbon footprint, hydrocarbons will fuel the world’s economy for decades to come. Renewable energy does not have the scale, timeframe or economics to materially change this outcome.

Fact No. 2: Once the economy recovers, oil demand is projected to increase by 1 million barrels per day each year, as world population grows from 6.8 billion today to 9 billion by 2050. The introduction of higher mileage standards in the U.S. and the gradual phasing in of electrical power into automotive drive trains will only moderate growth in automotive fuel demand. That is because nearly one billion vehicles on the road today could grow to approximately two billion vehicles in the next 30 years. Keep in mind: The U.S. has 1000 cars for every 1000 people; China has 10 cars per 1000.

Fact No. 3: Supply. We are not running out of oil. The issue is not our endowment of oil resources, it is the world’s production capacity. Additions from exploration last replaced annual production in 1987. The easiest oil has been discovered. Costs are increasing for new barrels, where wells can be drilled in water depths of over one mile to targets up to six miles deep, and discoveries can take over a decade to develop.

Oil field declines are running at more than 5 percent per year. That means we have to add at least 4 million barrels per day each year just to keep production flat. Yet non-OPEC production is in the process of, if not peaking, reaching a plateau. The U.K. Energy Research Centre just published a report that there is a significant risk that worldwide production of conventional oil could peak before 2020 and enter terminal decline. If we do not act now, we will have a devastating oil crisis in the next 5-to-10 years.

I’ve written several articles on Peak Oil over the past year and the points Hess makes could have come directly from them. It isn’t because I’m terribly smart, but in my opinion it is because our Peak Oil problem is a case of simple mathematics.

We stopped finding large oil fields 40 years ago. The production from those fields decreases every year and we simply can’t bring enough smaller fields on fast enough to offset those declines and grow daily oil production. We are like a rat on a treadmill.

The demand side of the equation is no help either. Population grows every year. And the most populous countries in the world grow per capita oil production every year as well. When you consider how many people are in China, India and other emerging countries and then consider how little oil each of them uses, it isn’t hard to see that changes in their lifestyle to include more oil consumption will make a big difference.

I’ve been investing in oil weighted producers for several years and the recent market turmoil has a lot of them selling at what I think are very attractive prices.

If you aren’t interested in picking stocks yourself I’d suggest considering an ETF that is loaded with oil producers. I’d personally avoid an ETF heavily weighted with the major oil companies that aren’t growing production and instead look for something focused on the smaller fast growing producers. Be aware that this will be much more volatile, but should also be much more rewarding if Hess and I are correct on oil prices.

One such ETF is IQ Global Oil Small Cap (NYSEARCA:IOIL) which had the following companies as its largest positions at its most recent reporting date:

Ticker

Company

Market Value

Weight %

HFC

HOLLYFRONTIER CORP

133,439

8.53

CLB

CORE LABORATOREIS N.V

108,182

6.91

OII

OCEANEERING INTL

99,050

6.33

SUN

SUNOCO INC

97,852

6.25

TSO

TESORO CORP

71,967

4.60

OTCPK:PMGLF

PETROMINERALS LTD

70,383

4.50

OTC:ALLZF

ALLIANCE OIL COMPANY LTD-SDR

49,802

3.18

OTCPK:ESVIF

ENSIGN ENERGY SERVICES INC

44,520

2.85

OTCPK:DRAGF

DRAGON OIL PLC

44,488

2.84

LUFK

LUFKIN INDS

43,850

2.80

OTC:TOIJF

THAI OIL PCL

38,207

2.44

KEG

KEY ENERGY SERVICES INC

37,543

2.40

MAU

ETABLISSEMENTS MAUREL ET

36,222

2.32

OTC:CTXAF

CALTEX AUSTRALIA LTD

34,782

2.22

OTC:IRPTF

IRPC PCL

34,736

2.22

5002

SHOWA SHELL SEKIYU KK

31,782

2.03

5007

COSMO OIL CO LTD

31,091

1.99

NES1V

NESTE OIL OYJ

29,713

1.90

KOG

KODIAK OIL & GAS CORP

28,067

1.79

PTTAR

PTT AROMATICS & REFINING

25,962

1.66

OTCPK:BNKJF

BANKERS PETROLEUM LTD

25,463

1.63

Source: Hess CEO: An Oil Insider Not Willing To Sugarcoat Our Peak Oil Problem