Peak Oil – The End Of The Oil Era

| October 29, 2007 | 0 Comments

Oil surpassing $90.00 per barrel and Peak Oil is here.

For those of you who have never heard the term, it is the most important two words in an oil trader’s life.  Peak oil referrers to the fact that this world of ours, as big as it is, holds a limited amount of oil.

Over the last 90 years, because of new oil discoveries, our available reserves of oil have grown.  We were finding more oil every year than we were extracting from the ground.  Our technology capabilities have grown as well, and with new processes and equipment, we have been able to extract more oil from a known oil field than ever before.

Peak Oil is when that process starts working in reverse.  At some point in the future we will be extracting more oil from the ground than we are finding, and the known world oil reserves will have peaked and started their decline.

Where we stand today, new discoveries of major oil fields have dwindled.  The oil that is being found these days is in very difficult to reach places, like the bottom of the ocean or the arctic refuge.  Because of this the cost to extract the oil has spiraled skyward.  The days of easy oil are over.

To compound this issue, demand is growing at an incredible rate.  China’s economic growth rate is nearing 7 or 8% per annum, and is the second largest consumer of oil in the world, behind only the United States.  In 2004, China came on the oil scene in a big way and increased global consumption by more than 3 million barrels per day.  India is growing as well and their energy consumption is rising.  Globally the demand for oil has never been higher.

Simply put, this is a basic case of supply and demand. Supply is stagnant or some would argue falling – either way it’s not growing like it used to – and demand is skyrocketing.  This is a perfect case for higher oil prices.

As we have seen from recent history, the consumer in America, and the world over, readily accepts the impact of higher energy prices.  As the price of gasoline – one of the most visible forms of energy consumption – rallied over the last few years from $1.50 a gallon to more than $2.50 a gallon (and in some cases more than $3.00) consumption didn’t fall!  If a 60%+ increase in prices won’t knock down consumption, the prospect of still higher prices is not at all un-reasonable.

For short term traders, negative news on oil supply is likely to have an oversized impact.  Any hint of supply disruptions, military conflicts, oil processing or delivery issues, will no doubt cause the price of oil to jump higher.  With Turkey saber rattling, and OPEC not caring about the price of oil, continued tensions in Iraq, and Iran stomping its feet, Hugo Chavez in Venezuela – it is only a matter of time before we get a major news event that takes oil prices higher.  Watch for these news events as they may be ways to profit from a jittery market.

The best way to play this market is by investing in the major oil processors.  Valero Energy (VLO) is one of the largest and most profitable in the industry.  The company owns more than 17 refineries in the US and Canada, which can process more than 3 million barrels of oil a day.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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