Tags: oil | drill | shale | population

Why the Days of Cheap Oil Are Gone

By    |   Monday, 10 March 2014 06:59 AM

One of the biggest things I like about owning oil companies is that the math game works in their favor.

For instance, it took 123 years for the global population to go from 1 billion to 2 billion people. But it only took 12 years for it to go from 6 billion people to 7 billion people. We hit the 7 billion mark in 2011.

So in nine years (or less), we'll likely see another billion people added to the planet, as we hit the 8 billion mark.

Well, there's only so much oil out there that's underground in this world. Yet as the global population grows, and as more and more of that population becomes better off, they're going to want to travel around in cars, trucks and motorcycles, etc.

All it takes is for time to pass for this to happen. It's going to happen by default. In fact, when you wake up tomorrow, another 190,000 people will have been added to the world (and that accounts for the deaths that happened that day, too.). In just the short time we've been into this year already, almost 14 million people have been added to the planet when you take into account both births and deaths.

So the rapidly growing global population itself will place increased demand upon the finite supplies of oil around the world.

But isn't oil production increasing? Isn't that what the news media says? Well, that's a tricky question. Yes, global production is increasing, BUT that's still not pushing the price of oil down. Why?

For years, we picked the "low-hanging fruit" when it came to oil drilling. You just poked a hole in the Earth where there was oil and "up it came."

Today, we have to drill deeper and even sideways. We have to break through rock (fracking) to get to it. The deeper we have to go to get it and the harder it is to get out of the ground, the more it costs to produce.

Also, it takes oil to make oil. What? Yes, they have to operate equipment that drills down into the ground and that equipment requires oil to run. Well, when oil was $20 per barrel that wasn't too bad. But today, oil is $100+ per barrel and so it costs more, just to go through the same process.

Another problem with oil these days is that the more expensive "shale oil" that we find today also depletes quicker. In other words, conventional oil wells lasted much longer than do shale oil wells, which are also more expensive to drill for. So that commands a higher oil price in the market to make it worthwhile to drill for more expensive oil that will run out quicker in each well.

(To drill the average shale oil well, the price of oil needs to be in the $80 to $100 area or higher.)

Next, OPEC needs oil to be at around $90 to $110 per barrel in order to meet their governmental budgets. You see, they don't judge what they need for oil to be at based on what it costs them to pull it out of the ground. No, since much of their money for their government is based on oil revenues, they see what their budgets are and figure out what they need oil at in order to meet those budgets.

The problem is that their budgets keep ballooning and it appears that there's no end in sight. So that means they will need oil to go even higher through the years in order to keep up with the "needs" of their government.

So there are lots of reasons why more oil is pumped out of the ground at a faster pace, yet the price of oil remains stubbornly high. The bad news is that this trend won't change. The good news is that if you own some of the world's best oil stocks, you'll be on the right side of the equation and you'll not get hurt by rising fuel inflation like the person who only consumes oil will do.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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One of the biggest things I like about owning oil companies is that the math game works in their favor.
Monday, 10 March 2014 06:59 AM
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