Whenever I think about how close we are to a world energy crisis, one sobering fact is always on my mind: Fossil fuels make up over 87% of the world’s energy consumption.
Think about it for a minute…
If we break that number down, we’re looking at a world where oil is still king:
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Petroleum: 40%
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Coal: 24%
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Natural gas is slightly less, around 23%
I honestly believe most people really have no idea how much 88 million barrels per day is. That’s how much oil the world is projected to consume in 2008.
Then again, oil addiction is something we can’t exactly preach others about. With only about 4.5% of the world’s population, the U.S. makes up roughly a quarter of global oil consumption.
But whether we’d like to admit it or not, fossil fuels are going to remain the dominant source of energy over the next decade. That presents quite a problem, however, considering global oil production is set to peak within the next few years (assuming it hasn’t already). According to the Energy Information Agency (EIA), the world’s oil consumption is expected to increase to over 100 million barrels per day.
Yet it isn’t just more demand we need to make up, but also the decline rates. Naturally, if oil field production didn’t decline, we’d only have to make up another 12 million barrels per day to hit the EIA’s projection. Depending on who you’re talking to, decline rates can vary between 4.5% and 8%.
In other words, we’ll need to add between 3-7 million barrels per day in production just to offset decline. That’s like finding a new Ghawar field every year! Even if Saudi Arabia is able to produce their target of 12 million barrels per day in 2009, I doubt it’ll be enough to make up for the production lost.
A Global Energy Crisis
Over the last few years, it seems that countries are becoming extremely defensive over their natural resources.
Take the fight between Venezuela and ExxonMobil, for example. So what exactly is this quarrel about? After taking the majority stake in several projects in the Orinoco basin, Chavez drew a line in the sand for foreign oil companies like ExxonMobil. By nationalizing those ventures, the companies could either accept the smaller stake or leave.
The whole dispute comes down to compensation.
Recently, Exxon won a court order to freeze $12 billion of Venezuela’s assets in order to ensure compensation. Chavez responded at first by threatening oil shipments to the U.S., then finally settling on stopping exports to just ExxonMobil.
The latest punch in this economic showdown was thrown by Chavez, who is now threatening to sue ExxonMobil over 500,000 barrels of crude oil the company “stole” from the country.
Regardless of the outcome, however, this is only going to lead to more production problems. The question is whether Venezuela’s state-run oil company, PDVSA, has the ability to develop the country’s massive reserves of heavy oil.
My concern is how exactly the world is going to increase production, especially we can no longer rely on production from our largest oil fields.
Remember, out of the ten largest oil fields in the world, only two are expected to increase production over the next decade. That’s including the Tupis field off the coast of Brazil, which is going to take a massive amount of investment to bring into production.
Nearly all of the other giant fields have peaked or are in serious decline. Just looking at Cantarell over the last few years is all it takes to realize some of these older fields are in trouble.
Investing in Our Energy Crisis
Despite investing more than $60 billion in capital spending, the major oil companies are finding it difficult to increase production. The largest drop came from Shell, which experienced a 4.5% decline in oil and gas output.
And those of you that have been waiting for crude prices to keep falling might have to keep on waiting, however. Like I mentioned last time, news that OPEC may cut production is a clear sign they’re trying to defend higher oil prices. That cut will be inevitable is oil supplies continue to increase.
Today, oil prices have been trading over $98 a barrel on news that OPEC may curb production. If oil can maintain prices over $90 a barrel during the winter months, I can only imagine how high the price will spike during the summer of 2008, when demand is at its greatest. For investors, higher oil prices will mean a record amount of investment over the next few years, and I’ll give you a small-I’m not just talking about the oil sector.
Until next time,
Keith Kohl
P.S. My Energy and Capital readers have been making a killing off the impending energy crisis. For our latest energy plays, 2008 is turning out to be another record-breaking year.
