The Peak-Oil Trail...

[Walleye]

One key point here is to understand that the amount of accessible oil and gas reserves is a function of their prices. Let's say that an oil and gas company is exploring in deep water in the Gulf of Mexico. If that company finds a modest amount of oil, and especially gas five miles deep and in 5000 feet of water depth, this is very expensive to produce and would most likely be left in the ground at lower oil prices...let's say at $30 or $40 per barrel. But it might actually be a money maker at sustained prices of $60+.

Same thing with coal gas and coal bed methane onshore, as another example. This stuff is expensive and typically comes in small quantities. You see the industry activity currently happening in these areas due to the higher prices. This activity didn't exist when gas prices were lower...so in effect the higher nat gas prices have unlocked these reserves.

Canadian Heavy Oil is another example. At higher oil prices...above $40/barrel, this stuff works. If we ever again see sustained oil prices below, say, $30 or even $40, some of these heavy oil projects will be in a world of hurt.

So the market is working. There is a lot of oil and gas left in the ground...gas hydrates in the arctic, ultra-deep water oil and gas- it's all just a function of sustained higher oil prices.

China is thirsty; yes...but there is a lot of oil left. It's all a question of price. It's a great and exciting time to be in the "oil bidness"...

[npg]

Indeed.

I would not go along with the apocalyptic crowd advocating that now is the time to learn how to grow your own food etc... Because it's all going to end.

My point is that analysis is best when both cases are made. The thesis and the antithesis. It's the classic essay structure. Nothing mind boggling here.

I know that I am OK handling both arguments and make up my mind.

You correctly state that for some low prices it's just not worth exploring certain fields. But for higher prices it may well be worth it. But that's the key argument. Oil is going to get more expensive.

Discarding the macro-economic view completely, there are quite a few still undervalued companies in the sector out there. The sector is still very unloved so it's worth scouting for companies trading below intrinsic value.

One sector definitively worth looking at is the oil services industry. My main argument is that one should not be brainwashed believing that the industry is not worth looking at just because they are dealing with a commodity. Latest developments are too important to simply ignore.

[Rooster]

My Father-in-law is all hyped up about hydrogen fuel cells. He thinks that is the wave of the future. I've noticed ethanol companies have been doing fairly well of late. That may be another angle. I wonder who will be able to guess what the primary world fuel source will be after high oil prices make it worth our while to switch. I'm sure that there will be more than one, but knowing the primary source that cars and trucks will turn to would be useful information.

Here are some search results related to hydrogen refueling stations. My take is that BLPD, PLUG, and FCEL are the primary hydrogen plays.

Yahoo! Search - Web Search

[Rooster]

Another great article:

The oil squeeze has just begun - MSN Money

[Rooster]

High Oil-Field Costs Crimp
Search for New Supplies

Inflated Gear Prices
Almost Guarantee
New Crude Records
By BHUSHAN BAHREE
August 1, 2007

Fierce cost escalation in the oil patch is complicating the industry's ability to respond to higher prices with new supplies, setting the stage for still-higher prices in the months and years to come.

• Pumping Prices: Oil companies are encountering cost run-ups and delays as they compete for scarcer, pricier field equipment and services.
• Demand Disconnect: The trend complicates oil-industry efforts to tap new projects to capture higher prices.
• Off Balance: Projects driven by higher prices have helped quell oil's rise in the past.


During past surges, higher oil prices pinched consumers and the economy but also made a greater amount of untapped oil economical to pump. As a result, new supplies eventually came online, putting downward pressure on prices. That dynamic helped tame the high oil prices of the early 1980s.

But during the current four-year rise in oil prices, inflation for equipment, labor and other crucial oil-field needs has largely kept up with the rise in oil prices. In recent quarters, this has crimped results at the world's oil producers, including Western majors such as Exxon Mobil Corp. as well as the world's biggest state-run oil companies, and has also led to delays and cancellations of major projects. While plenty of activity remains in place, the high prices are nibbling away at other projects that were expected to bring significant new supplies of oil and natural gas to the world.

"Supply is going no place, and demand is rising 2.5% to 3% a year," says economist Philip Verleger Jr. of Aspen, Colo.
U.S. benchmark crude for September delivery reached a new settlement high yesterday of $78.21 a barrel, beating the previous record of $77.03 reached July 14, 2006. It remains far short of the inflation-adjusted record of more than $101 a barrel in April 1980.

Prices for things including drilling rigs and skilled laborers have largely kept up with the oil-price rise. Research firm Cambridge Energy Research Associates estimates capital costs for the oil industry's exploration and investment have risen nearly 80% since 2000. The average price of West Texas Intermediate crude roughly doubled over the same period, to about $61.60 a barrel in the first half of this year from an average of about $30.30 in 2000, according to Barclays Capital.

Rising prices for equipment and services are expected to lead to more investment in those areas, picking up the slack over the long term. Until that happens, consumers could see prices continue to rise.

Ed Morse, chief energy economist at Lehman Brothers in New York, reckons that "we have not yet seen the top in prices." He expects the cost of oil to keep rising by $5 to $10 a barrel on average annually for several years. After that, he estimates, the oil industry's ability to meet demand may be enhanced by the addition of biofuels and other nontraditional fuel sources.

The renewed rise in oil prices comes at a difficult time for the U.S., the world's largest petroleum consumer. Falling home prices are already making consumers feel poorer, causing them to cut spending. Meanwhile, government data suggest businesses are having a harder time increasing productivity, a factor that has helped them offset higher prices in the past. As a result, higher prices could both slow the economy and hit corporate profits.

"It's another negative in an environment that has a lot of negatives already at work," says Joseph Carson, chief economist at investment management firm Alliance Bernstein in New York.

Oil-project cost inflation has contributed to project delays and postponements, while facilities operating flat out to meet demand are shutting down for unplanned maintenance. Many of today's projects are bigger and in tougher environments as oil producers search farther afield for new supplies, further straining budgets.

A survey of the oil industry's exploration and production spending by Lehman Brothers last year concluded that some 299 oil and gas companies were planning to increase their spending by 9% to $292 billion in 2007 from $268 billion in 2006. A second Lehman report concluded that the industry's costs to find and develop oil in 2006 averaged about $20.40 a barrel, four times the $5 a barrel cost in 2001. As a result, the report said, incremental oil supply growth barely will be able to keep up with demand growth until 2011.

In Kazakhstan, the world's biggest oil find in nearly 40 years has suffered delays, with costs for the first phase spiralling to $19 billion, or nearly twice the original estimates. Now oil is expected to start flowing in 2010, some five years late.

In Russia's remote eastern Sakhalin Island, Royal Dutch Shell PLC was forced to cede majority control in a huge project to state-owned OAO Gazprom after a massive cost overrun of some $10 billion.

Oil industry officials say that prices will have to keep rising to curb consumption, matching energy use with available supply. If the world economy continues to grow strongly, it will be able to absorb higher energy costs, as it has done so far, but there would be a massive transfer of wealth to oil producers, further empowering countries like Russia, Saudi Arabia, Iran and Venezuela.

Yesterday, the Organization of Petroleum Exporting Countries disclosed that its members' revenue from petroleum exports rose 22% to a record $649 billion last year.

--Mark Whitehouse and Guy Chazan contributed to this article.

Write to Bhushan Bahree at bhushan.bahree@wsj.com
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[Rooster]

Making the Best of $78-a-Barrel Oil

Investors Are Flocking
To Slew of Offerings
In Hot Energy Markets
By ELEANOR LAISE
August 1, 2007

As oil prices hit new highs, investors are finding new opportunities -- and new risks -- in the energy sector.
MORE ON ENERGY

• SUVs are Becoming More Fuel Efficient


Money managers say individual investors, hoping to tap into the energy gains, have been moving beyond traditional energy plays like buying shares of big oil producers to pour money into more exotic instruments. Among these: new investment products specializing in energy partnerships that are designed to generate a steady stream of income, and a slew of funds focusing on solar power, wind turbines and other alternative energy sources. Popular commodities funds that invest heavily in oil futures contracts also are likely to get a lift following a recent significant shift in the futures market, which is expected to boost the funds' returns.

Rising oil prices raise concerns about an economic slowdown, and investors "want to have money in the one place that is going to benefit from higher energy prices," says Edward Guinness, an analyst for the Guinness Atkinson Global Energy fund, which holds shares of energy companies. Yesterday, the price of oil rose $1.38 to $78.21 a barrel, a record close, though still far short of the inflation-adjusted record close of more than $101 hit in 1980.

But the new products are also risky. Since many energy-related investments have posted big returns in recent years, new investors may be buying in at inflated prices. And not all energy investments are rising -- natural gas prices have fallen in recent months.

Energy investments, of course, won't necessarily track commodity prices. Some of the new offerings can also be influenced by unrelated factors like interest rates, and that can mean different risks and rewards for investors. Energy investments also tend to be volatile; that's especially true of some of the clean energy funds, which are full of tiny companies with uncertain prospects.

Despite the risks, investors this year have poured some $1.6 billion into energy mutual and exchange-traded funds, which now hold about $33 billion, according to fund-tracker AMG Data Services. That's accelerated recently, and in late July the number of mutual funds attracting inflows was the highest in a year, AMG says.

It's tough to predict how long oil prices can stay aloft. Last summer, prices were close to today's levels but then tumbled, in part because of a mild hurricane season. Even so, a number of analysts see a sustained period of higher prices ahead. Goldman Sachs Group Inc. predicts oil could climb as high as $95 a barrel by the end of the year, while CIBC World Markets is forecasting $100 oil later next year as supply struggles to keep up with demand.

Futures Funds
Energy-heavy funds that use futures contracts to gain exposure to oil have given investors a wild ride in recent years, but now they may be poised for better returns.

Commodity prices are just one factor influencing the returns of these funds, including exchange-traded products like U.S. Oil Fund LP, which charges fees of 0.5% of assets, and the broader iShares S&P GSCI Commodity-Indexed Trust, which charges 0.75%. For much of the past few years, oil futures markets have been in "contango," a peculiar condition in which longer-dated contracts are pricier than those of closer months. (A futures contract is an agreement to buy or sell a product at a certain price on a particular date.) That forced the funds to continually sell lower-price contracts and buy higher-price contracts, crimping returns even as oil prices soared. The U.S. Oil fund, for example, fell about 16% in the year through July 30.

But in recent weeks, oil futures prices have flipped, and longer-dated contracts are now generally cheaper than earlier months' contracts. That gives many funds an extra performance boost that's independent of any movement in the actual price of oil.



"Last year, commodity futures investors faced huge headwinds, and those headwinds have abated," says Matthew Hougan, editor of IndexUniverse.com. Thanks to the recent pricing shift, these investors should now start seeing returns that more closely resemble commodity prices, he says.

Drilling for Income
Some new energy investments are based on publicly traded energy partnerships that generate a steady stream of income, but for the most part don't directly profit from higher oil prices. These master limited partnerships, such as Kinder Morgan Energy Partners LP and Enterprise Products Partners LP, are often in the business of storing or transporting natural resources, and a big selling point is high yields, often around 5% or 6%. But as income-oriented investments, MLPs can suffer when interest rates rise.

Investors should also expect MLPs' recent strong returns to moderate, experts say. While the Alerian MLP Select Index rose more than 40% in the year through June, Gabriel Hammond, managing partner at Alerian Capital Management, says, "are you going to be up 40% next year? No."

Since they tend to be in relatively stable businesses like oil pipelines, MLPs are typically not closely tied to oil prices and can be less volatile than many other energy investments. By contrast, a number of new MLPs have launched, including BreitBurn Energy Partners LP, that are engaged in energy exploration and production and are expected to be more closely tied to volatile commodity prices.

Firms offering new MLP investments include Bear Stearns Cos., which recently launched the BearLinx Alerian MLP Select Index, an exchange-traded note that tracks an index of MLPs, and Citigroup Inc., which in May began offering to retail and high net worth investors structured products tied to its own MLP index.

Such products can come with hefty fees. The Citigroup product charges 3%, while Bear Stearns charges 0.85%, which is well above the average fee for an ETF. The upside: Investors in these products don't have to deal with the cumbersome K-1 partnership tax form that direct MLP investors receive.

Clean Alternatives
Funds that aim to profit from growing demand for solar panels, wind turbines, and other clean or alternative energy sources are among the most popular -- and most volatile -- of the new breed of energy plays.

Though alternative energy investments can benefit from sustained higher oil prices, they're not closely linked to short-term commodity-price movements, experts say. If oil is up one week and down the next, that's "not a good reason to trade in and out of clean energy," says Rob Wilder, manager of the WilderHill Clean Energy Index, the benchmark tracked by the PowerShares WilderHill Clean Energy ETF.

Some financial advisers say investors aren't being rewarded for the risks they're taking in alternative energy. Brian Kazanchy, chairman of the investment committee at wealth management firm RegentAtlantic Capital, recently examined the performance of the PowerShares WilderHill Clean Energy ETF from its launch in March 2005 through June of this year. He found that it behaved much like the small-cap Russell 2000 Growth Index. And while the ETF had slightly better returns, it also had much higher risk.



High energy prices make it more attractive to invest in technologies like wind and solar power. Fees vary widely. The Guinness Atkinson Alternative Energy fund, launched last year, charges expenses of 1.98%, compared with 1.51% for the average natural-resources fund, according to Morningstar Inc. The PowerShares WilderHill Clean Energy ETF, however, charges just 0.6%.

Alternative energy stocks "have not been good performers," given the level of risk, Mr. Kazanchy says. Investors should "avoid alternative energy investments at this point."

[npg]

Very nice reports, but couldn't one have just linked to them?

As far as 'alternative' engery is concerned... That is just way too speculative. It could however, spark a boom similar to the .com days if people totally lose their heads. However, that may be unlikely given the current climate.

I'd go for the easy pitch. Oil experiences a squeeze. People who realised this 3 years ago did very well. So far things have held up quite nicely. What happens when the real big squeeze comes? Nobody knows. It could spark a recession which in turn will reduce demand for oil again. All that is speculation of course.

However, what is far simpler and less troublesome is to just look at the major oil corporations who are still very cheap. I don't think you can fight a war with iPods. So why should they be so ridicolously low valued against other companies of less strategic importance?

VLO at its current PE is too cheap. COP? A good buy at 80$ still. But my favorite right now is RDS/A. One of my tennis buddies works for them :) So I get to know quite a bit about that company. Looks like they have the edge when it comes to exporing oil in difficult terrain.

[Gunnski]

Very timely posts & insights posted above. Found while sifting through old threads/posts. Interesting thoughts back in '07.

[danno]

Everyone should check out, "The Long Emergency" by
James Kunstler. It's definitely on the doomsday side of the issue but a very interesting read. I personally, work in the offshore oil exploration field but won't include energy companies in my portfolio as I feel it's too volatile and political.