Peak Oil Statistics – Reasons to invest

With the prospect of the credit crunch affecting company earnings, I’ve decided to switch my investments into oil related assets which I hope will emerge with their fundamentals in tact. This post lays out some of the rational behind this move which is based in the theory of peak oil.

Many of the companies I’ve invested in are valued far below their reserves at current prices (circa $50 per barrel). In the future I expect the oil price to rise significantly.

Recently the IEA produced a report detailing aspects of oil production, both present and future.  This report has been summarised and discussed on the Oil Drum website, this page links to relevant posts.

Current Oil Production and Oil Production Decline

The world is currently producing around 85 million barrels per day, an important figure to remember when comparing against OPEC cuts (1.5 million barrels) and natural production decline rates (4-5 million barrels).

It is anticipates that oil production will decline at around 4% per year (Rates vary  within the report which mentions 6.7% for post peak fields and the Oil Drum suspects this is more realistic)

Worldwide reserves

This Oil Drum post discusses both OPEC and non OPEC reserves.  It has long been suggested that OPEC have overestimated their reserves and looking at the table which lists the OPEC reserves it appears they haven’t changed in 30 years even though they’ve been selling (ie depleting) a lot of oil over that period!!!

In summary, it suggests that while we can trust non OPEC reserves, OPEC ones cannot be trusted and hence the IEA report may be overly bullish.

World Population growth

Population growth will be another key driver in the future oil price.  With China and India industrialising at rapid pace, more and more people will be driving cars, using air conditioning etc.  Taken from the Peak Oil wiki page:

Author Matt Savinar predicts that oil production in 2030 will have declined back to 1980 levels as worldwide demand for oil significantly out-paces production

In this classic Fool post, Hal mentions that oil demand has increased at around 2.5% a year.  With demand increasing and supply decreasing, there is only one direction for the price of oil!

Increased Price of Oil Extraction

As easy oil has already been extracted we are turning to oil that is deeper, tar sands etc.  The price of extracting these barrels is can be over $50 a barrel.  Therefor the current drop in the oil price means that future projects will be shelved causing supply problems down the line.  Many predict the oil price the rebound strongly.  At some point producers will shut in there production rather than sell oil at a loss.