Really, Really Bad News About Oil

Some years ago I wrote a paper called ‘A ‘New’ World Oil Market’ (2004), which I presented at a conference somewhere. The intention of that paper was to argue that the world oil market was in the process of a rapid transition, and the combination of resource scarcity and accelerating demand (relative to supply) would cause a fundamental shift in the market. I said in that paper essentially what I am going to say here, only at that time I couldn’t prove a few of the things that needed proving. All that has changed: it changed when the price of oil reached $100/b and continued to rise, because with that price and the present movements of global oil supply and demand, proofs are no longer necessary. This time the wolf is here!

In the American Navy there was once a saying that ‘On every ship there is someone who doesn’t get the message’, however on this ship everyone is finally getting the message, where everyone includes a former head of the Petroleum Industry Research Foundation in New York, who once claimed that OPEC is “on its way into a stagnant volume environment at best”. This misleading statement can be translated as ‘OPEC’s oil is increasingly unimportant’.

For me OPEC is – and has always been – the oil producing countries of the Middle East. I’ve never concerned myself with the others because, as Matt Damon said in the film Syriana: “It” – meaning oil – “is running out, and most of what is left is in the Middle East”. As I never tire of pointing out in my seminars, some people find this difficult to accept, because some people specialize in being wrong. The Cambridge Energy Research Associates [CERA] once said that OPEC’s fate was not in its own hands, although the truth is that it has always been in its own hands, with the difference being that now that organization is fully aware of this very dramatic fact.

Unfortunately, or fortunately as the case may be, dealing with Middle Eastern energy resources also involves issues far outside that part of the world, because it happens to be true that it is no longer advisable to discuss Middle Eastern prospects without considering the actions and/or goals of other energy producers, and vice versa. Here we have a perfect example of what in game theory is called ‘strategic interaction’.

Hopefully this will become at least partially clear in the sequel, but to begin I want to offer an extremely valuable insight into one phenomenon that will characterize the future oil market, which I will provide now, because it should be confronted and thought about as soon as possible. Regardless of what you have heard or will hear, read or will read, thought or will think and regardless of the assurances that the oil and gas exporters in the Middle East give or will give, it is doubtful whether those exporters are able or for that matter willing to provide the energy resources that their customers desire or will come to desire, at prices resembling those of the recent past.

And here I ask my favorite question: would you supply these resources if you were in their place?

A BIT OF OIL HISTORY AND ECONOMICS

The agenda of the foreign producers (i.e. Big Oil or the ‘Seven Sisters’) in Saudi Arabia ostensibly featured a progressive raising of oil production to twenty million barrels of oil per day (= 20mb/d), and keeping it there as long as it made economic sense – i.e. was profitable. The thing to be understood is that the strategy underlying this production profile turned on maximizing profits over a limited time horizon, and here I want to emphasize that the choice of a time horizon was as important or even more important than other components of their production strategy, which is an observation that you did not encounter in Economics 101. You didn’t encounter it because the teachers of Economics 101 do not know how to handle the production of exhaustible resources like oil. However after the October War (of 1973), when the assets of these companies were confiscated by their previous hosts, a very different agenda was introduced

The goal of the confiscating governments, and especially Saudi Arabia, also turned on maximizing profits, although over a much longer time horizon. In addition, when the opportunity presented itself, these profits were to be used to diversify their economies in such a way that the main source of prosperity would be reproducible capital – i.e. structures and machines – rather than exhaustible natural resources such as oil and gas. The opportunity arrived in full bloom when the price of oil suddenly exceeded 40 or 50 dollars per barrel, because those prices gave the governments of many oil producing countries the kind of freedom that President Bush and his colleagues believe only comes about by living or trying to live the American Dream. Everyone who has watched CNN or the U.S. program ‘60 Minutes’ has probably seen a brilliant example of this process in that lucky and superbly managed country Dubai. Returning to the agenda for Saudi Arabia, ‘sustainable’ oil production over an indefinite future was envisaged at about 10 mb/d, or less, while an additional 1-2 million barrels per day were to constitute surge capacity (which is capacity intended for use over a short period).

Notice the or less in the above, because the present King Abdullah of Saudi Arabia recently said that the world cannot count on large increases in the output of his country after 2010, which is interesting because some observers think that today’s oil production is less than Saudi production a year ago.

Needless to say, this kind of thinking and acting on the part of Middle Eastern governments did not win approval everywhere. For instance, the position taken by an outspoken Nobel (Prize) Laureate, the late Professor Milton Friedman of the University of Chicago, was that the general welfare was always best served by unambiguous profit maximizing behavior, supervised by hard-core capitalists. When the assets of the short-run profit maximizers throughout the Middle East were confiscated, and formal production quotas for oil established by OPEC, Friedman predicted that the price of oil would collapse and OPEC would fall apart. Friedman’s irrational forecast is best forgotten, but even so I want to present and comment on a similar vision of the Middle East oil scene that was put together by another University of Chicago Nobel Prize Winner, Professor Gary Becker. Writing in Business Week (March 17, 2003) he presented his audience with the following soap-opera:

Middle Eastern nations are far less important to world oil production than they were immediately after the formation of OPEC. Their share of world oil production has fallen from almost 40% to less than 30% now. In order to raise the global price of oil the OPEC cartel, led by Saudi Arabia, had to restrict its members’ production. This raised prices, encouraging non-OPEC nations, including Russia, to expand production. Also, oil companies have made greater efforts to find new deposits deep in ocean waters, in the frozen tundra of Siberia, and in China and elsewhere.

This statement is completely without any scientific value, but it deserves some attention. Becker’s twisted faith in deep water deposits, as well as large new deposits becoming available in Russia and China is best described as bizarre. Although a few years ago the best energy economist in Russia said that his country could raise its oil production to 30 mb/d of oil and keep it there, the truth is that oil production in Russia has now roughly flattened at about 10 mb/d. According to Leonid Fedun, vice-president of the largest independent company in the Russian oil sector, it is unlikely that output will ever exceed that amount. He could be slightly wrong of course, but it would hardly increase by enough to result in Professor Becker being nominated for another Nobel. Something that needs to be appreciated by all oil importers is that Russia is potentially a very rich country, and an increasing fraction of Russian energy production is going to be consumed domestically.

China is already a country with a large oil deficit, and where the growth in oil consumption is much larger than the growth in domestic supply. These deficiencies are probably increasing faster than anywhere else in the world, to include the United States. Oil companies are making great efforts to find new deposits “deep in ocean waters”, are drilling boreholes everywhere, exploiting deposits in remote locations in the far north of Alaska, and perhaps far up in the Arctic Ocean, and desire greater access to coastal waters. Regardless of how much desiring and drilling and exploiting they do however, it will not suffice to replace Middle Eastern resources, nor greatly depress the oil price. Only a new energy technology in conjunction with a reduction in demand growth for conventional oil is likely to do that! This unpleasant truth has escaped Professor Becker, but it is well known in the executive suites of both ‘Big and Little Oil’.

Finally, attention can be directed to the decline in OPEC production that was mentioned by Becker, and which that scholar interpreted as a misfortune for those nations. The earlier decline in OPEC production, and its present slow increase, is the key source of the new economic strength of the Middle East, as well as some of the other OPEC countries. If they had maintained their output at 40% of the total, they might still be trying to raise the price of oil to $28/b.

IRAQ AND OIL

Alan Greenspan is not my favorite economist, but I am sure that he is highly talented professionally and socially, completely at home in the great world of banking and finance; and despite accusations of late that his judgement was occasionally unsound when he was chairman of the U.S. Federal Reserve System (where he was frequently described as the second most important man in the United States), I think that very often he had information to offer about energy matters that should have been given a maximum amount of attention.

His latest contribution – apparently surfacing in his recently published memoirs – is that although not usually discussed in public, everybody knew that the war in Iraq was about oil. By everybody he didn’t mean people like me, but people like himself: serious insiders with important places to visit and important things to do after they arrive. People who are relaxed when in the presence of minds that move the world – as they are called on CNN. Minds that were and perhaps still are at the disposal of Sir Alan, both in elegant conference rooms, and at tasteful dinner parties where high-level gossip is circulated with the same nonchalance as coffee and brandy.

In one way or another Mr Greenspan has been told, and probably a number of times after the cognac has gone around the table, the same thing that Matt Damon told viewers of the film Syriana, and that being the case, some of the decision makers in his network pondering the bad news about the availability of motor fuel have almost certainly found themselves thinking or suggesting or implying or insisting that extraordinary measures might someday be necessary to keep the wheels of economic progress spinning in the oil importing countries.

Everything considered, I feel it necessary to ask another question at this point: if you can’t believe Alan Greenspan on this issue, then who can you believe.

Having once inspected at great length a map originating with the U.S. Government Printing Office (in Washington D.C.), which indicated landing zones in the Gulf for paratroopers and marines, and having heard Alan Greenspan say aloud and in English what he believes is the reason for the Iraq war, and knowing that in the widely read Time Magazine Henry Kissinger once broached a military option, it has lately become easy for me to accept that the United States and others might be prepared to go to war to ensure the future obtainability of oil. Put another way, a short and successful war might have been considered by somebody to be the optimal move to put OPEC in its place, where by somebody I do not mean somebody in the South Bronx or Watts.

Moreover, in a class or seminar room I might be prone to claim that the oil resources of Iraq are not only large but, in theory, large enough to buy the time needed to establish the new energy economy referred to above, and which – unless they are comatose or irresponsible – every upper echelon politician and civil servant in the energy importing countries knows will have to be established sooner or later – although like myself they do not know how.

Some numbers might be informative to curious readers. According to last year’s BP Statistical Review of World Energy, Iraq has 115 billion barrels of proved oil reserves, as compared to 264 billion barrels for Saudi Arabia. Current sustainable output for Iraq is probably less than 3 mb/d, while before the present war the maximum output was close to 3.5 mb/d. More important though, of Iraq’s discovered and evaluated oil resources, a sizable fraction may still be unexploited. One of the most important observers of both Iraqi (and Middle Eastern) oil is Dr. Mamdouh G. Salameh (2004), who points out that in many respects the oil resources of that country are more impressive than those of Saudi Arabia.

Consequently, some influential and not so influential people think that Iraq can and should raise its production to 6 mb/d, and there has even been some talk of getting it up to 8 mb/d. According to a former Iraqi oil minister or decision maker though, output in this range would create the greatest problem ever faced by OPEC, which is the reason why they are not going to abandon OPEC quotas. Why should they, when they see what is happening in a neighboring country.

Five or six years ago, the price of oil was $22/b, predictions were that it would fall under $20/b, and OPEC was desperately trying to get the oil price up to a sustainable $28/b. So let’s think in terms of the latter figure, and round off U.S. oil imports both at that time and today to 10 mb/d of oil. If for computational purposes we take the present price of oil to be $130/b, then the U.S. is paying almost a billion dollars a day more for imported oil than they were paying six or seven years ago, which is about the increase in the amount received by exporters to the U.S.

Now think about Saudi Arabia, which might be exporting about 9 mb/d of oil. A movement of the oil price from the desired $28/b to $130/b means an increase in daily income of about a billion dollars when various expenses are taken into consideration. In these circumstances it is easy to understand how Saudi Arabia plans to finance the establishment of four new economic zones that will include state-of-the-art manufacturing facilities, and also to understand why that country feels it unwise to invest in additional oil producing capacity. Why should they or any other country in the Middle East invest? Why contribute to or initiate a decrease in the price of an exhaustible resource?

FINAL STATEMENT: PEAK OIL

Last year I taught the course on oil and gas economics at the Asian Institute of Technology (Bangkok), and at some point I asked one of my students what he thought of my discussion of the ‘peak oil’ theory. He had no problem with it, he said, but the director of the oil company for which he worked thought that it was nonsense. I also received that judgement from a gentleman who published one of my short papers on oil. He published it, he said, in the interest of fairness, because he did not believe in the peaking of the global oil supply, which struck me as odd, since he and his friends and his network must have been even more aware than I am that a large majority of the world’s giant deposits have peaked or reached a plateau, and the same applies of course to smaller deposits.

I mentioned earlier the published opinion of a man that I call “the best energy economist” in Russia on the oil supply of that country, and perhaps I should note that the oil minister of Saudi Arabia once said that his country could raise its production to 15 mb/d of oil, and maintain it there indefinitely. If these things were really true, and Professor Becker was just partially correct in his evaluation of the world oil scene, then nobody has to worry about a peaking in the near future of the global oil supply and what that could mean for an oil price that is already too high. At present one hears as much about the detrimental effect of increasing food prices as the danger posed by escalating oil prices, but the former is partially dependent on the latter, because of the high energy intensity of modern agriculture.

The position taken in this exposition is that none of the optimism that may be circulating about the oil future is justified. The statement by the Russian gentleman, given his competence, was probably a simple mistake, and the Saudi oil minister later suggested that his remarks were misinterpreted, and if he hadn’t suggested it the position of the present King (Abdullah) of Saudi Arabia was quite clear. In other words, the declaration thirty-five years ago by the Saudi head of state that the oil of his country was to be placed at the disposal of both present and future generations of Saudi citizens and not motorists in the oil importing countries was the real deal and not idle chatter.

What about the director of the oil company where my student was employed, or for that matter a similar contention by the directors of Exxon (XOM) – the largest and most profitable oil company in the world – who have repeatedly rejected the idea of peak oil, or the gentleman in New York who published my paper, although he didn’t believe in peak oil, or the people in the U.S. Department of Energy [USDOE] and the International Energy Agency whose forecasts of the global oil production in 2030 are (or were) masterpieces of absurdity, or the well known consulting company Cambridge Energy Research Associate [CERA], with offices in North America and Europe and probably elsewhere, and a Pulitzer Prize winning oil expert as its chief, which has come to the goofy conclusion that while there might be a peak, it will be an undulating peak. What is going through the heads of the people involved here?

""It’s called money, Virginia”, to use some of that beautiful Wall Street terminology."

As a result, it is perfectly logical for the boss of my student to want to give the impression that in reality there is a very large amount of oil in the crust of the earth, and so present or future technology will have no problem with its discovery or extraction, and therefore a resort to unconventional energy sources is unnecessary. Whether he or his colleagues at Exxon and a few other major oil firms, or the present oil minister of Saudi Arabia, and oil ministers and tycoons elsewhere, actually believe this song-and-dance in their heart of hearts is completely irrelevant. They know, even better than I do, that discovery in the Middle East has peaked, and it is only a matter of time before output from the largest deposits peak. Of course, in one sense it doesn’t make any difference whether Middle Eastern and other deposits peak or not, because the relatively small increases in their output will not be able to match the dynamic growth of demand in China and India: this unambiguous process can be reduced to the supply and demand curves in Econ 101.

Let me also note that if the Saudi King is serious about not raising production, then the largest producing country in the world might already be in the process of peaking. You can interpret for yourself what that means, but the billionaire investor T. Boone Pickens interprets it to mean that global peaking is already taking place.

The important thing for me where this topic is concerned was or is informing students and others how they should study the subject. The approach here is simple, and not a single one of my students at the Asian Institute of Technology had a problem with it. What it involves is examining in detail the peaking of oil in the United States, which is often labeled the richest country in the world, and thus able and willing to mobilize the absolute latest and most sophisticated technology, as well as employ the best managerial and scientific and engineering talent in the world to supervise and upgrade that technology.

The peak oil drama in the U.S. can be reduced to the following. The peaking of oil discovery in the U.S. took place in the early l930s. The peaking of production in what is called the lower 48 – i.e. the U.S. minus Alaska and Hawaii – took place in late l970, or about 40 years later. Furthermore, the giant Prudhoe oil structure in Alaska came on stream after the peaking of production in the lower 48, and as a result output in the (entire) U.S. turned up, but even so it never reached the 1970 peak – which mathematicians would therefore call the global peak for that country. One more item belongs here. Even though output in the U.S. peaked in l970, today the U.S. is producing about 5.5 million barrels of oil per day, or more than any country except Saudi Arabia and Russia.

This indicates that the peaking of production in the U.S., or in the British and Norwegian North Sea, or in Russia, or the peaking that will eventually take place in the Middle East, is an economic and not a geological phenomenon. But certain phenomena that involve both economics and geology are worth emphasizing, especially the reality that if discovery peaks, then eventually output will peak. Global discovery peaked about 1965, and according to the present Vice President of the U.S. in a talk that he once gave – but his conservative friends choose not to remember – the peaking of the world oil output cannot be avoided, and he thought that it could take place as early as 2008. This is probably not correct, but Mr Cheney is an insider in the oil world, which means that he is not in the habit of saying things that would offend his friends and neighbors.

Moreover, global oil consumption exceeded global discovery for the first time (in modern times) in 1980, and for every barrel of oil discovered, about three are consumed. These factors help to explain why the oil price is so high, along with the fact that almost all oil producers understand that it is a mistake to produce oil today that could be produced and sold later at a much higher price.

If enough producers feel that way, then it is almost guaranteed that the higher price will come about. And it has come about, and not only that it may have come to stay.

REFERENCES
Banks, Ferdinand E. (2008). ‘OPEC and oil’. Petromin.
______ (2007). The Political Economy of World Energy: An Introductory Textbook. London and Singapore: World Scientific.
______ (2004). ‘A new world oil market’. Geopolitics of Energy (December).
Crandall, Maureen S. (2006). Energy, Economics and Dreams in the Caspian Region. Westport, Connecticut: Praeger.
Robelius, Fredrik (2006). ‘Oljefyndet är en bluff’. PsX Press
Salameh, Mamdouh G. (2004). Over a barrel. Salameh: Surrey England

Comments

[myopinion]

Other sources of energy will more and more replace oil.

[User 202310]

This writer is verbose and in desperate need of a good editor.

[myopinion]

Other sources of energy will more and more replace oil.

[Moses]

High oil prices ain't such a bad thing. We have all the energy we will ever need from the sun, wind, and the earth (thermal). It is just a matter of time before they are more cost effective than oil.

[lucidone]

It is exactly this type of fear mongering that fuels the price of oil. Tell everyone it is running out, and they will buy buy buy. With the recent discovery of a massive field off the coast of Brazil, proven untapped reserves in the US that may exceed Saudi reserves, untapped Russian/Central Asian and African sources, and unknown but potentially staggering reserves in the Arctic and Antarctic, oil is far from exhausted. This fact compounded with the actually renewable nature of oil, makes most of this articles assertions baseless. However, the author does have a good point, in that oil producing countries have a motivation to keep supply capacity tight, to keep the price up of course. They offer government subsidized oil to their citizens, which keeps them calm. They then make a killing on the open market. The only problem with this strategy is that it will motivate the exploration and exploitation of new and existing fields. Eventually, spare capacity will come up, and the price will plummet, mush as it did during the 80's and 90's. While some would argue that the growth of China and India will continually put pressure on the price, everyone knows that they cannot grow at the current rate forever. Something will happen which will curb growth, it always does. If anything, with the current psuedo recession in the US, there will be a delayed ripple effect in China and India which will curb growth. A higher price of oil will also serve to curb growth, since the newly minted middle class of those countries have much less disposable income to absorb oil/gas price shocks. This combined with an increase in the usage of natural gas and "green" technologies in the west, will put additional downward pressures on oil. This article mainly parrots the discredited Hubbert's Peak predictions. Its main impact will be to fuel additional speculation and misunderstanding. It is not the supply of oil, global demand, or hurricanes that are responsible for oil's metoric rise, it is the reactive, and potentially biased influence of the media and energy analysts. Just like the silver, .com, real estate bubbles, this one will collapse to, its just a matter of when.

[Mmarrkk]

Lucidone: what you are missing is that while there MAY be large additional sources of oil being found or available, the price to extract these volumes is very high. The large discovery mentioned in Brazil will cost close to $80/bbl to extract and then there will be transport costs, etc. And that is assuming steel prices, etc. don't inflate at high rates. Much of the oil in the US that is not developed will be very expensive to bring to market and will cost a lot in terms of the environment. You need to look at the cost of bringing on incremental oil volumes. While old oil and Saudi oil is cheap to produce, getting oil out of Deepwater Fields where it cost $100 million plus to just drill ONE WELL isn't cheap. Without high prices for oil (greater than $80-90/BO), the newer volumes won't be developed as they will be uneconomic.

And yes, at today's prices, alternatives will be attractive. But oil will be around.

Cheapest oil left to produce: Iraq. But then, you have to factor in the knuckleheads blowing up facilities so the risk and security costs go up.

[maximax]

LUCIDONE - your comment smacks of ignorance but feel free to prove me wrong:

"proven untapped reserves in the US that may exceed Saudi reserves" - I heavily doubt that. I mean, they don't. Not conventional reserves. And forget about oil shale. But feel free to name your source(s).

"there will be a delayed ripple effect in China and India which will curb growth. A higher price of oil will also serve to curb growth, since the newly minted middle class of those countries have much less disposable income to absorb oil/gas price shocks." - it seems to be news to you that consumers don't pay market prices for petroleum products in these countries.

"discredited Hubbert's Peak predictions" - Hubbert's predictions were for the US and one of his scenarios initially worked. Nowadays Hubbert's methodology seems simplistic and outdated, but that does not mean oil supply is infinite.

"actually renewable nature of oil" - are you a proponent of the abiogenic oil theory? Or how long do you think it takes for biomass to become oil? For the purposes of mankind, petroleum is not renewable. I have read many downright ludicrous things about oil in reader's comments (and quite a few articles) here on seekingalpha, but this one wins the price.

[lucidone]

MMarrkk is correct, new reserves are expensive to develop, this is why a higher price motivates companies to invest in the extraction. However, once the initial capital costs of establishing the infrastructure are accounted for, the extraction costs will drop preciptiously. Improved technologies will also contribute to this decline, this may take years, and would partially be offset by demand increases. Two other components which have not been discussed are: the absence of spare refinery capacity in the US, and the fact that technology exists to produce synthetic oil at about $80/bl. If the US gov./oil companies invested in these infrastructure improvements we would see additional declines.

[westwest888]

Dubai is not a country. I stopped reading after that glaring error...

[lucidone]

maximax- to repond: oil reserves: let me qualify that as the America's : www.radford.edu/~wkovarik/oil/index.h...

Also, China and India will only be able to subsidize prices for so long.

And yes, I do believe in abiogenic oil, especially considering that hydrogen and carbon are the 1st and 4th most plentiful elements in the universe.

[lucidone]

correct link: www.radford.edu/~wkovarik/oil/

[dbinia]

Other sources of energy will complement oil; nothing will replace it, ever. There are products of crude oil we simply can't replace and most people won't do without. Want to eat? Farming is energy intensive. Want to buy food? Its shipped by truck from farm to markets. Want to travel? Oil is the only realistic fuel for aircraft. Want to protect yourself? Oil (products) are required to run trucks, planes, helos, ships, tanks, etc. If nothing else, US demand grows with our population; we can slow the growth in absolute terms but won't eliminate it. Suggest reading the DOE report for some additional insights at: www.netl.doe.gov/publi...

[iThinkBig]

I think the writer makes some good points and to summarize I believe Mmarrrks comments were right on target. Offshore drilling, ANWR even if politically decided on tomorrow would take a few years to bring online. Perhaps as little as three if Washington makes dramatic moves which I do not forsee (at least in the short-term but I think they should!).

Alternatives will replace much demand but again, this requires investment and time. I think Mr. Bank's point about how the Saudi government and OPEC views production and capital redeployment over the long-term are correct. Whether it is 20 years or 2 years from now, demand will begin outstripping supply. The emerging world including the ME as a whole seems to be diversifying into alternative energy and pausing oil R&D. It certainly doesn't make sense for OPEC to increase supply. Why would they? This is an indirect but non-beneficial way which forces the U.S. to become energy independent.

But as a nation (or just human nature) we always tend to be reactive rather then proactive. The age of the Quantum Computer & drastically increasing statistical probability in forecasting will no doubt change our entire globe's way of conducting business. Until then, the best guess says we'll see oil ease to around $80 a barrel short-term, see demand destruction and global recession, rise again in a year or two and then consistently stay near the $100 range until more alternative supply can replace a larger portion of petroleum demand.

[cdknop]

Badly written article.

As to peak oil, Lucidone is right about demand destruction and ample supplies. Prices at these levels are not justified. Increases in Chines demand are more than canceled out by the decrease in US demand. India's oil companies are going bankrupt, and it can't afford the subsidies anymore. New drilling everywhere, especially alternative fossil fuels, such as the shales (Bakken, Rockies, etc.). If new tech allows us to extract 40% instead of 35%, we add another Saudi Arabia to reserves, instantly, ready to recover. And the good oil companies can already do this.

It just makes me sick to see greedy investors rationalize this price spike in order to profit.

[nobodynobody]

LUCIDONE writes “….. This fact compounded with the actually renewable nature of oil, makes most of this articles assertions baseless” On what planet specifically are you refereeing where one might find renewable oil???

The bottom line is FLOW RATES not reserves. Basic math yields the obvious truth. 4.5% annual depletion rate (CERA), 2% annual global demand increase (IEA) and a finite supply of petroleum. The question is where do these points intersect.? SOON! Nuff said.

[good time charlie]

It's like the weather.....everybody talks about it......long on oil for 5 years and loviing it.

[The Stockaccumulator]

The
Stockaccumulator

Good article, but a far better buy today would be PBR during this brief rare, mini-pullback in PBR...Read the below carefully researched article from "The street.com on Petroleo Brasileiro:

" (PBR - Cramer's Take - Stockpickr) shareholders have earned a 172% return on their investment over the last 52 weeks.

"If last week's positive earnings announcement is any indication, this Brazilian oil company has a lot more going for it than just good-looking charts (though the charts look good, too.)

PetroBras Returns Continue to Beat Oil and Brazil Investment Benchmarks

PetroBras boasts nearly a $300 billion market capitalization (its market cap just passed that of Microsoft(MSFT - Cramer's Take - Stockpickr)).

In fact, it now claims to be the third-largest publicly traded company in the Americas, behind Exxon Mobil(XOM - Cramer's Take - Stockpickr) and General Electric(GE - Cramer's Take - Stockpickr).

With a presence like that, it's clearly a bellwether stock both for the Latin American region and in the oil sector.

PetroBras does a lot: It explores for and produces oil and natural gas. It sells surplus production in Brazil and foreign markets. PetroBras operates oil tankers, distribution pipelines, marine, river and lake terminals, thermal power plants, fertilizer plants and petrochemical units. It is also building new pipelines for ethanol distribution and recently set up a separate operation to manage all its ethanol activities.

Here are three reasons I like PetroBras.

1. The recent oil and gas announcements are real.

In the last six months, PetroBras has discovered three super-giant oil fields in Brazil's offshore Santos Basin. The company also confirmed in January a major natural gas and condensate deposit in the Jupiter area.

If estimates of 33 billion barrels in reserve from another field (Carioca-Sugar Loaf) prove correct, then this ranks as the third-largest oil field in the world after Saudi Arabia's Ghawar (66 billion barrels) and Kuwait's Greater Burgan (46 billion barrels). "

Rudy Martin the writer ot this is the former director of research for TheStreet.com Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter. "

It is expected that PBR will have a huge number for this coming quarter's earnings announcement very shortly. Never has there been such a huge expected net profit number from any oil company, and due to the April and May record price of crude. The graphs show the accumulation going into and through each earnings announcement to be far more impressive than any other large oil/gas company... One will have to take great risk with smaller similar companies... PBR will make you money next week/month, and expect $140 by next year this time for PBR... todays $68 is a brief temporary bargain... in a week or so PBR will be back to its all time high of $78... this is a rare opportunity... research it, look at the graphs... amazing for such a large well established company that is perhaps the microsoft of oil...

I may buy 20,000 more shares of PBR today or early tommorrow...

Warmest regards... the STOCK ACCUMULATOR

[CLH]

Verbose because its garbage. ALL commodities not made by man are limited. So what!! As the price goes up the demand goes down until no one wants it.

[xsuddensam]

As the world's largest consumer of oil, Americans can thank our political leaders for our non-existent energy policy and our cheap gas. They ignored the early warning of the 1970's oil shock, kept gasoline cheap and they did nothing to find alternative fuels.

Back then, if the politicians had slapped an extra one dollar/gal. tax on the American consumer, Detroit would have been forced to build more fuel efficient vehicles, air pollution would have been decreased and demand and prices would have fallen. I'm sure big oil and Detroit would have loved that.

Now, we are literally bent over a barrel of oil with few if any alternatives. There are no immediate viable solutions. Hopefully, the high cost of fuel will promote conservation and thereby drive down demand and prices. Without leadership and a sound energy policy, we are facing social and economic catastrophy. It might already be too late.

[billp37]

Liberal arts educated author?

:-)

www.theoildrum.com/nod...

[jackooo]

OPEC is an oil monopoly uncontrolled by U.S. interests.
That said, you can find all the oil you want. If OPEC drops their production volume and we increase our volume the price per barrel stays the same.
If OPEC oil runs dry, we will only be sending them billions of dollars in relief money to survive. We cannot win!!! Get use to it....

[ronsboat]

It doesn't matter how much new oil is discovered. The fact is demand is more than supply. Peak oil, call it what you like but high prices are here to stay and the world will go into a recession/depression.

[lucidone]

Really?? Take a look at this recent development


Senate witness today described the chairman of the U.S. Commodity Futures Trading Commission (CFTC), which is allowing U.S. oil futures market speculation to be "regulated" by British and Dubai, instead of American, authorities. In a hearing on manipulation of the skyrocketing oil price, the expert witness, University of Maryland law professor Michael Greenberger, told seven angry members of the Senate Commerce Committee that 35% of U.S.-based trading in West Texas Intermediate Crude oil futures has shifted to "dark markets," completely unregulated, by agreement with Britain. On these markets in particular, Greenberger said, a few hedge funds and three investment houses--Goldman Sachs, Morgan Stanley, and JP Morgan Chase--are controlling 70% of the speculative buying of U.S. oil futures and driving the price of oil steadily upward, while "ironically, issuing `predictions' that it's going to $200/barrel." This London-Wall Street speculative manipulation of oil and energy prices, with the knowing wink of the CFTC and its chairmanWalter Lukken, was also targetted by Consumer Federation of America witness Dr. Mark Cooper, and by the Senators themselves, as "the London Loophole" accounting for anywhere from 35-50% of the current price of a barrel of crude oil. Cooper told the Senators, "Roll up your sleeves, assert the national authority of the United States, and regulate these markets." On May 25, Sen. Maria Cantwell and 22 other Senators had released a letter to the CFTC demanding that the "London Loophole" be closed. Lukken had responded on May 29 promising action "by Fall." That exchange alone was enough, said Greenberger, to brake the dizzying oil price rise at about $135-going-on-$200, and pull it back down to around $125/barrel. Senator Cantwell said after today's hearing, "Now there will be a lot more signers; and I believe CFTC will take the action required by the economy, and by the morality of the American people, now." If not, she believes the Senate will legislate to force CFTC's hand. Greenberger and Cooper laid out in detail, how 35% of West Texas crude futures are traded on a market headquartered in Atlanta, Georgia--the Intercontinental Commodity Exchange, or ICE--which by CFTC staff actions, is juridically a London offshore market overseen only by the British Financial Services Authority! And oil futures trading on the New York Mercantile Exchange (NYMEX) is now "regulated" only by the London-controlled financial authority of Dubai, under another CFTC staff agreement. On what are effectively British offshore markets, Greenberger said, the above-cited banks and hedge funds are simply "continuing and repeating the `subprime' crash of the securities markets, and all their derivatives, on the commodities markets." Adding a sobering note, Gerry Ramm of the Petroleum Marketers Association of America told the Committee that gasoline/diesel/propan... dealers all over the country were facing bankruptcy and would start closing their stations, because "we can't get the credit to buy our receivables" which have doubled in price.

[Ronmac]

Stock accumulator, I wish you would buy that damned PBR (today or tomorrow!!!) and quit telling us on every article, every day you are going to do it. If you did what you said, you would probably now own hundreds of thousands of shares...give it a rest.

cdknop. What are you doing on a site interested in investing in commodities? Seems like a more socialist site would be better for your views.

And finally lucidone, just where do you think oil comes from?...don't give me a link, give your understanding...prefer... in less than a couple of hundred words.

[LoveShorting]

To Dr. Banks - - Being smart is not enough. This is an internet site
where you compete with many other authors ... BE MORE CONCISE !
Too much reading when there are so many others to read.

Lucidone - - Thanks for the illumination. And thanks for being concise. Your words provide hope (of profit from DUG).

[Whisper On The Wind]

If I'd been in that class he taught, I might have gotten some much needed sleep...

[bill d]

Sold my DUG options today - think I may have got lucky and timed it - but nobody ever went broke taking a profit.
So you predicted the price of oil would be up 4 years ago ?
Wow.
I predict you will probably be just as _________ 4 years from now.
I'm sure you will be able to predict what the blanks represent.

[Jake2]

Stock Accumulator: Give it a rest. You' are wasting your time. How many times are you going to repeat that PBR stuff? Trying to sell something, are you?

[CrossProfit]

This article is an attempted re-write of the author's previous article, basically saying much the same.
See:
seekingalpha.com/artic...