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October 06, 2003

The End of Oil
by David Chapman

What would a world without oil look like? While posing what seems to be a preposterous question it is one that we all may have to deal with in our lifetime. First let us look at what is easily available facts concerning oil production, consumption and reserves.

It is estimated that the world currently has somewhat over one trillion barrel of reserves. Of that some two thirds of it lies in the Mid-East with just 5 countries; Saudi Arabia, Iraq, United Arab Emirates, Kuwait and Iran. While the roughly one trillion reserves estimate comes from industry sources compiled by the World Oil and Gas Journal others have put the world estimate lower at around 750 billion barrels. Further it is estimated that there might be another 500 billion barrels of conventional reserves still to be discovered but again it is largely in the Mid-East or in Central Asia.

There are also numerous sources of unconventional reserves that will only become economical as oil prices rise. Some such as the Western Canada oil sands are already in production but many others are in environmentally sensitive areas such as deep in the ocean and the Artic. As well there is potential for more in areas of heavy oil fields in Venezuela and oil shale sources in the US, Brazil, Zaire, India and some others. All told it is estimated that there might be 3 trillion of reserves from unconventional sources but environmental sensitivity and cost could lower that substantially if it is ever available. 

Current world production and consumption are generally in balance at around 75 million barrels per day. Of this the USA is the world's biggest consumer using some 20 million barrels per day or 26% of the world's total. Total annual consumption is therefore around 27.7 billion barrels. Current daily consumption slightly exceeds production with the shortfall being made up with inventories. At the current rate of consumption and using the conventional estimate of reserves of one trillion barrels, the world's oil would be consumed in a mere 36 years. And this is without taking into consideration any increased demand particularly from Asia primarily China and India.

We might add that there is a similar situation with natural gas. Natural gas accounts for roughly 25% of world energy supplies. To complete the contribution of various energy sources, Oil supplies 37%, coal 26%, nuclear 6%, and hydroelectric 6%. As we can note alternative energy's contribution is negligible. But natural gas reserves are more plentiful and studies have shown that they would last more than 60 years at current rates of consumption. The Mid-East has roughly 36% of the world's reserves while Europe and Asia combined have another 39%. Unlike oil, gas can not be shipped safely making its availability much beyond the local region difficult.

North America, who is the world's largest consumer of energy, has less than 5% of both the world's natural gas reserves and oil reserves. The US alone consumes over 25% of the world's oil and total energy consumption is comparable with only about 5% of the world's population. Continued demand in other parts of the world again particularly in Asia (China) assures that world energy demands will continue to rise. Natural gas demand is projected alone to rise 50% over the next twenty years. But with new discoveries and improved technology used to find natural gas it is expected that reserves will keep pace.

Not so with oil. Oil remains not only important it is essential that a stable and ongoing low cost source is available to the western economies or they will go into permanent economic decline. Unless alternative energy sources become bigger to replace oil in particular for automobiles a collision of unparalleled proportions appears to be in the works. For the cynics, it is no wonder there is such an interest in controlling the volatile Mid-East where upwards of 65% of the world's oil reserves lie with the potential for even more. It does raise the potential for a century of wars for control of oil and other commodities. All wars, after all, are ultimately economic.

Without energy conservation programs, higher prices and a stronger move to alternative energy sources a collision course is guaranteed. And higher prices are guaranteed although in the short term oil and gas prices can fluctuate depending upon inventories and production increases. Impacts could be seen certainly by the end of this decade if not sooner.

The recent softness in oil prices and as well in natural gas prices we believe is a buying opportunity. Investors should be patient, though, as the current correction in oil and gas prices may have a little more time to run. But as we move into the winter season prices tend to rise. If we couple this with any potential for instability in the Mid-East, the world's most volatile region, then it could put considerable upward pressure on prices this winter. Investors should ensure that they have some exposure to the oil and gas sector either directly through oil and gas stocks or the service companies or through the oil and gas income trusts.

Our man in the Calgary oil patch, Crude Ken, returned from his globetrotting long enough to leave us some of his favourite picks. His list is provided below. Percentage gains are from our last oil & gas report on March 31, 2003.

Former picks from our March 31, 2003 article were Progress Energy (PGX-TSX) up 22%, Cequel Energy (CQL-TSX) up 19%, Bow Valley Energy (BVX-TSX) down 57%, Peyto Exploration (PEY-TSX) up 69% but most of the gain was made after converting to an income trust, Suncor Energy (SU-TSX) down 2%.

We would also like to leave you with one chart. Our daily chart below is of the Oil Service Holders Trust that issues depository receipts called Oil Service HOLDRs (OIH-NYSE). The trust holds shares of common stocks issued by companies that provide products, management and services for the oil service industry. They are amongst the 20 largest and most liquid traded securities in the oil services industry.

Amongst the larger weightings are Baker Hughes Inc. (BHI-NYSE), Halliburton Co. (HAL-NYSE), and Schlumberger Ltd. (SLB-NYSE). The chart is forming a massive symmetrical triangle. This triangle is being at higher lows then the one seen in September 2001. The break out level is at $65 with targets up to $95. Current breakdown levels are near $56 but the pattern appears to be very bullish and put less probability in that happening.

The world is running out of an energy source that is essential to our economic well being. While the shortages will not materialize for several years investors should be aware of this so that they can plan and watch the markets accordingly.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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