Kiss My Vindication
Peak Oil Goes Mainstream
Seven years ago, I was sitting in the Fort Worth Club drinking bourbon with several oil execs, investors, and the up-and-coming CEO of a tiny oil company who had a rather novel idea.
We had just returned from visiting a legendary oil boomtown called Desdemona.
On the way back from Desdemona, we took an impromptu tour of the Barnett Shale, a yet unproven source of natural gas.
Oil was trading for $35 a barrel at the time, natural gas for $2 per mcf.
Desdemona has a romantic history in Texas oil lore.
In September 1918, Tom Dees, director of the Hog Creek Oil Company, struck oil on land owned by Joe Duke... and Desdemona quickly joined the list of Western boomtowns.
As many as sixteen thousand flocked to Desdemona between 1919 and 1922.
At this time, the Desdemona field was perhaps the second largest in the United States, and stockholders of the Hog Creek Oil Company could sell their $100 shares for $10,250 each.
At its peak in 1919, Desdemona was pumping out 20,000 barrels of oil per day. The easy money attracted prospectors as well as prostitutes. Crime flourished.
It was all good.
But these were the early days of the oil industry. And technology for maintaining reservoir pressure and field integrity didn’t exist.
As a result, by 1922, production had dropped to 6,000 barrels a day.
The boom turned into a bust.
By the time I visited Desdemona, oil coming out of the ground was a mere trickle.
However, there was still a significant amount of oil left in the reservoir — maybe has much as a billion barrels.
This brings me to the CEO’s novel idea...
You see, as we sat in the Fort Worth Club, the CEO and the other oil executives began talking, throwing out names and phrases that were completely foreign to me:
- M. King Hubbert
- Matthew Simmons
- Hubbert’s Peak
- Peak Oil
- Catastrophic decline rates
- Enhanced oil extraction
- $125 a barrel oil
- The end of cheap oil
- The need to find two Saudi Arabias by 2015 to meet demand
I’ll be honest. Your editor felt about as out of place as a vegan at a bull roast...
I simply didn’t understand what they were saying. But it definitely piqued my curiosity.
I went back to Baltimore and read everything I could get my hands on about M. King Hubbert.
I talked to Matt Simmons for hours, and picked his brain about Peak Oil and Saudi Arabia.
I studied oil field dynamics… secondary and tertiary oil extraction… horizontal drilling… fracturing… decline rates of the top 25 producing oil fields...
And when I was done, I realized the world was facing a crisis of epic proportions. I also knew that if I was right, this would be the investment opportunity of the century.
The world was running out of cheap oil. And the CEO at Fort Worth Club told me that we have no other choice but to go after every single drop of oil left behind in aging oil fields, like Desdemona.
If you’ve been reading Wealth Daily since its beginning seven years ago, you know one of our major investment theses has been Peak Oil. (You can read more of what we were saying back then here, here, and here.)
In 2004, we made a bold call: Oil was going to hit $150 a barrel in five years.
Well, we were wrong. It happened in four years.
Along the way, we took a lot of heat from the establishment for being alarmists, “peak freaks,” doom-and-gloomers, and just plain idiots. After all, for the past three decades, so-called "experts" have predicted the world was running out of oil...
In 1999, oil dropped below $12 a barrel! The Economist declared the world was awash in oil.
Still, we maintained our controversial position. And we’ve made a lot of investors money from our Peak Oil thesis.
Earlier this week, the International Energy Agency (IEA) released its World Energy Outlook 2010. Once a phrase reserved for the conspiracy theorists, the term peak oil is peppered throughout this year’s report.
Oil prices will rise beyond $200 a barrel as global supplies — strained by rising demand from China, India, and other emerging economies — near their peak in 2035, the IEA said yesterday.
According to the report, a major reason for the rising prices and flatlining production is that for "the currently producing fields of crude oil, the production will decline.”
Today's active oil fields produce about 70 million barrels per day; but by 2035, "they will produce less than 20 million barrels per day of oil."
Just to keep crude oil production flat would require much more production from new oil fields — including those discovered but not yet developed, and others still to be discovered.
The IEA forecasts Saudi Arabia — the largest producer — would boost its production by 50 percent, and Iraq would nearly triple its production.
Maintaining this plateau would require massive investment in the oil industry, the report estimated — about $8 trillion over the next 25 years. The IEA's main scenario also sees production from the Canadian oil sands tripling in the next 25 years.
The investment opportunities from this event are numerous.
But in the coming weeks, we will bring you several opportunities that the mainstream investment community has absolutely zero knowledge of.
Publisher, Wealth Daily
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