Putting Statoil's Recent 'Major' Oil Discovery in Perspective

| About: Statoil ASA (STO)

Last week I saw a few headlines announcing the most significant exploration find in Norwegian waters in more than a decade by Statoil (NYSE:STO). I thought that was pretty exciting as Norway is no slouch when it comes to oil production so a “major” discovery is good news for everyone. Here is how Norway ranks amongst countries in terms of 2010 oil production (according to the Associated Press):

1. Russia – 9.5 million barrels per day

2. Saudi Arabia – 8.3 million barrels per day

3. United States – 5.4 million barrels per day

4. Iran – 4.0 million barrels per day

5. China – 3.8 million barrels per day

6. Mexico – 2.6 million barrels per day

7. Canada – 2.6 million barrels per day

8. United Arab Emirates – 2.4 million barrels per day

9. Iraq – 2.4 million barrels per day

10. Kuwait – 2.4 million barrels per day

11. Venezuela – 2.3 million barrels per day

12. Nigeria – 2.2 million barrels per day

13. Norway – 2.1 million barrels per day

14. Brazil – 2.0 million barrels per day

15. Angola – 1.9 million barrels per day

Norway is clearly a major producer basically on par with Nigeria, Venezuela and Kuwait. But simply looking at the amount of oil a country produces doesn’t fully capture the importance of its production to the world. How much oil a country is actually able to export after domestic consumption is a better measure of its importance to the rest of the world. Here are the top exporting oil producers (note that the data on exports is slightly dated as it is from 2008):

1. Saudi Arabia – 8.7 million barrels

2. Russia – 4.9 million barrels

3. Iran – 2.7 million barrels

4. United Arab Emirates – 2.7 million barrels per day

5. Canada 2.4 million barrels per day

6. Norway 2.3 million barrels per day

Because Norway is a small country relative to its oil production they export a lot of what they produce. Ranking sixth means they are very significant contributors to global oil supply.

Peak oil has been a controversial subject for quite a while now. Near the turn of the century as oil prices hovered in the $15 to $20 range anyone spreading the concept of peak oil around was viewed as a bit extreme. As oil prices rose higher and higher prior to the great recession of 2008/2009 the concept of peak oil became more mainstream. Today with oil back over $100 it is back in the minds of the media.

On CNBC we have Larry Kudlow on CNBC again shouting “Drill baby, drill” as a means of controlling oil prices. Maybe Larry is right, maybe we can drill our way out this situation. Maybe peak oil isn’t a big deal and we just have to get after it and drill. After all, Statoil exploring in the waters of a major oil producer and exporter just hit on the biggest exploration find in 10 years for Norway. That should give us some hope that we can drill our way to ample oil supplies and lower oil prices.

Maybe not.

Norway’s biggest find in 10 years at the Skrugard prospect in the Barents Sea is estimated to hold 250 million barrels of recoverable oil. That sounds like a lot. But to put it into perspective consider that the world is now consuming almost 90 million barrels of oil per day. The Statoil discovery will supply the world’s oil needs for slightly less than 3 days. In other words Norway’s biggest discovery in 10 years is a rounding error in the grand scheme of things.

Make no mistake. Peak oil isn’t a theory developed by some conspiracy theorist. It is common sense based on simple mathematics. Look at the graph below from the late Matt Simmons. Humans didn’t seriously start chasing after oil reserves globally until after World War II after we realized how important the black stuff was. And despite continuously improving technologies and expanded efforts the world has been finding less and less of the stuff every year.

Every year we find less. Every year we use more. Figuring out that we are going to run into a supply and demand problem should be so simple it is funny. Except that since we are completely reliant on oil to feed our people and power our economies there really isn’t much funny about it.

$150 or $200 oil has the potential to do a lot of damage to your investment portfolio if you aren't prepared for it. Conversely, if you are prepared for it could be something you can profit from.

There will be pullbacks in the price of oil over the next decade in what I think will be a cyclical march upwards. I'm going to use those pullbacks to load up on any bargains it presents.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , Major Integrated Oil & Gas, Norway
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