Truth And Consequence

Written By Brian Hicks

Posted April 6, 2006

Dear Reader,

It’s interesting how $60 oil has gone so gently into this good night.

Even though prices have eased, the consumer has accepted this new paradigm, like so much else, without much thought.

Sometimes I wonder just where along the oil curve we are. What I mean is, just how close are we to a developed, viable, mass-market energy alternative that can power automobiles and the many other consumer items that have become vital to our economy?

The short answer is ‘not close enough.’

It’s a no-brainer; hydrocarbons are finite.

In these terms, the Middle East is living on borrowed time. Because at some point in the future, the commodity that has allowed their civilizations to rise from the desert squalor to incredible wealth, will become obsolete.

Now, I’m not saying the end of the Carbon Age is right around the corner. Even if a new, clean mass-market energy source is developed and ready for the market next year (a long shot at best), there will still be strong demand for oil from developing nations unable to afford the new technology.

But it’s clear that fifty years from now, perhaps much sooner, the main driver of Middle East wealth will have gone by the wayside.

Right now, what we’re seeing is a furious, last-ditch effort to satiate world markets and extract as much oil as fast as possible, costs be damned.


OPEC knows as well as anyone that even the hint of a shortage-or worse-a production decline, will send prices into the triple digits.

And this event, when it happens, will usher in the beginning of the end for the Middle East.

Reports of a water cut nearing 50% at Saudi Arabia’s Ghawar field, if true, are a harbinger of these developments.

And that’s why production rates have become de rigeuer in the oil industry.

“Production capacity over the next few years is more important than reserves,” said Sadad Husseini, a former top official at Saudi Arabia’s state oil company Saudi Aramco.

But what about those pesky reserve figures?

You’ll recall that Kuwait was recently outed after a government document stating the country had about half the oil officially stated made its way into the media’s hands.

Funny thing is, the country never really denied the report.

Husseini, for his part, claims that Saudi Arabia’s proven reserve figure of 262 billion barrels is accurate, a view that is widely disputed among industry professionals.

In the face of such certainty, it’s odd there’s so much concern in OPEC about rapid depletion of remaining reserves.

“If accelerated depletion results in severe and rapid production drops, say within 10 or 15 years, that can’t be good for the global economy,” said Husseini.

“On the other hand, if reserves are left untapped for 30 or 40 years, the world will have moved on to other fuels and the remaining reserves may become irrelevant.”

Either way, there’s no transparency in reserve calculations for the OPEC countries. It’s widely known that reserves were upgraded, big-time, back in the 80s when production quotas were based on how much oil a country had.

That’s when Saudi Arabia came up with its inflated figure, which, hasn’t budged since. And there were no discoveries made to justify the increase.

“But what about technology?”, you might ask. Can’t technology help us find previously hidden reserves, and those oil fields, like those rumored to be just off the continental shelves in deep water, now be accessed with modern seismic and production methods?

The numbers don’t bear this out. As you’re probably aware, it’s been almost 30 years since the last million barrel per day find.

And this is during a time when technology has taken a quantum leap forward.

Schlumberger, by far the most technologically advanced oil services firm, which prominently includes drilling technology, spent over $500 million last year alone on new technology.

And late last year the company added a 53,000 square foot addition to its Global Drilling Technology Center in England, where more than 270 engineers toil away developing new drilling systems and such.

In fact, the company can drill even horizontal wells incredible distances, and so accurate that the company’s CEO Andrew Gould said “we can hit a target the size of a tennis court from 10 miles away.”

How much more technologically advanced can we get?

Either way, the end game is nearing.

I don’t predict fire and brimstone, or a brutish, Hobbesian post-carbon age of cold, huddled masses.

On the contrary, I expect living standards to rise exponentially in the coming decades…I’m decidedly bullish.

For now, however, it’s clear that we’re in an investment climate which will allow us to reap incredible gains as the world slowly comes to grips with a limited, and soon declining, oil supply.

Of course, our portfolio is full of companies leveraged to profit from this trend.

And as a Wealth Daily reader, you’re no stranger to just how explosive the right energy company can be.

In the coming weeks you’ll hear about a new energy company from the editors of Wealth Daily. Stay tuned.

– Phantom Trader

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