Don’t be deceived by today’s oil prices. In the next few years, the oil market is facing severe disruptions. Here’s a preview of what’s coming and how to get ready for it.

Oil prices skyrocketed to $147 in July 2008. The financial crisis rocked the economy and many markets melted down, including oil. Media commentators breathed a sigh of relief. They said

it was all a false alarm—just a temporary bubble. They instructed everybody to forget about oil stocks and get back to the usual “conventional” investments. Those who listened to it missed

out on some fabulous profit opportunities, and these unfortunate investors will be slapped in the face again and again in the next few years because oil prices are going to roar back up.

Let’s dispel some of the misinformation being peddled by the media today by breaking down three common myths being reported in the news. Let’s start with a fantasy that sounds convincing but is ultimately hollow.

Myth #1 - Natural Gas Will Solve Our Energy Problems

The energy majors are making a big push into gas, but the reality is gas won’t replace oil anytime soon. BP recently announced a “dash for gas.” Shell is cutting back its Canadian oil sands operations in favor of gas elsewhere. Exxon Mobil bought gas rich XTO Energy in a $31 billion deal.

There have also been lots of announcements of big gas finds. Cambridge Energy Research Associates (CERA) just ran a multiple-page ad in the Wall Street Journal about the “shale gale”—the disruptive impact that new sources of shale gas will exert on the natural gas market. CERA is hopeful that all this gas will take over much of oil’s role in transportation.

The U.S. apparently has a lot more gas than previously thought. The Potential Gas Committee

recently estimated that our future recoverable resources could supply the U.S. for 100 years at current levels of consumption.

On the surface, these optimistic stories sound good. But there are lots of problems you aren’t hearing about:

• CERA hopes we can start using gas to power our cars, but this can’t occur the way CERA describes.

• Utility companies don’t want to invest billions in natural-gas plants when Washington is threatening to restrict their use.

It’s true the U.S. has a lot of gas which could solve the energy crisis, but realistically that’s not going to happen anytime soon.

Myth #2 – New Oil Discoveries are solving the Oil Crisis

Media reports about new oil discoveries sound promising, but the full truth isn’t being told. Take the Bakken Formation, for example. Its true there is a lot of potential oil here; however, it’s miniscule compared to total oil demand. Last year, the Bakken produced 80 million barrels of oil. That sounds like a lot, but it’s less than one day of global oil consumption.

Shale oil in Colorado is being bandied about in the media again, but it’s no better now than it was 30 years ago. This stuff isn’t actually oil—it’s kerogen, a thick waxy substance that does not flow into wells. Instead the rock has to be mined and ground up, and the kerogen melted out and heated before any oil is obtained.

Can America get oil from this? Yes, but only at much higher oil prices—$150 or even $200. Until then, it’s just not economical.

The same is turning out to be true for the Canadian oil sands. This ‘miraculous’ deposit also contains a huge amount of oil. But the bubble there is deflating too. For example, Shell is scaling back its plans to increase oil-sand production. Turns out that thick frozen gunk consisting of sand and heavy tar isn’t all that profitable when the world wants light liquid crude oil at only $80 per barrel. We saw oil sands become popular when oil was approaching $150. We’ll see energy companies returning to Alberta once oil hits $150 again. Until then, it’s not a big deal.

Myth #3 - Peak oil has been disproved

Oil tanked because of the financial crisis, not because peak oil was wrong. Once the financial mess gets straightened out, oil prices will roar back.

About 85 percent of the world’s oil is produced by just 21 nations. Many of these have already peaked and turned down. The list includes the US (formerly the world’s largest producer), OPEC member Indonesia, Venezuela, the United Kingdom, Norway, Libya, and Mexico. The world has lost almost 20 million barrels of daily oil production because of these declines.

The only reason global oil supplies haven’t tanked during the last couple of years is that supply

was forced up to compensate. The extra came mostly from Saudi Arabia, Russia, and China, with a little more from Brazil and Angola. Unfortunately, little extra capacity is left today. Russian and Chinese production has plateaued. The Saudis claim to have a little extra capacity left, but many officials (like famed oil analyst Matt Simmons) warn that the Saudis are covering up growing problems at Ghawar, the world’s largest oil field.

Oil CEO’s like Jose Gabrielli of Petrobras, and Sadad al-Huseini formerly of Saudi Aramco admitted to peak oil.

New discoveries can be made, but they will take years for the first drop of oil to be drilled from the ground and many technical problems will need to be worked out.

World oil markets are dangerously vulnerable to violent disruptions in the short-term, and turning upside-down from peak oil in as little as two years. As Will Whitehorn, chairman of a UK task force on peak oil and energy security recently noted, “Oil is going to become too precious just to burn in cars. Oil is the source of our fertilizer, of our pesticides and pharmaceuticals, of most of our furnishings. It is the lifeblood of civilization.”

I believe $80 oil will soon be a faint memory. And that means energy investors should continue to reap very handsome rewards over the next few years. Stay tuned for a wild ride.

 

 

 

James DiGeorgia is the editor of the Gold & Energy Advisor and a published author of several books about gold and oil, including his latest release, “The Trader’s Great Gold Rush: Must-Have Methods for Trading and Investing in The Gold Market.” Petroleumworld does not necessarily share these views.

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