| Profit
From Energy Opportunities |
| The depletion
of the world’s cheap hydrocarbons is now a foregone conclusion |
| By Chris Gilpin contributing editor to the
Casey
Energy Speculator |
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| The timing of when this goes from being a nuisance
to a problem to a full-blown crisis is difficult to gauge, but peak oil,
as an argument, is the correct argument. The U.S. reached its peak oil
production in 1971, and I have no doubt that the world will do so within
a generation, more than likely encouraged by more blunders in the Middle
East. |
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| Speaking as an investor, the question at this
point is not ‘will there be another energy crisis?’ The question is ‘how
can I profit from it?’ Below, Chris Gilpin from our Casey
Energy Speculator research team gives you a better idea of why oil
prices and energy stocks are headed higher, and how you might profit. |
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| This is an important time to stop and check your
premises on oil, because getting it right can be extraordinarily profitable. |
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| Doug Casey - Chairman
- Casey Research |
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an energy crisis is brewing
that could dwarf the one the United States faced in 1979-80 - huge profits
are going to be made - technical indicators clearly show that energy stocks
are poised to advance
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| Is $100 Oil Cheap? |
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| Many market pundits wrote that $40 per bbl crude
was expensive, that $60 crude was unsustainable, that $80 crude would never
happen. But here we sit with oil over $90 and looking like it wants to
take out $100. |
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| We think it will, and then continue from there.
Sure, crude may decline in the short term, with the surge of summer vacation
driving behind us and with refineries reducing their intake of oil as they
gear down for annual maintenance. But the sheer practicality of cars will
keep them on the road in increasing numbers – in the U.S., China and anywhere
else in the world where people increasingly have the means to buy one –
or two, if they can swing it. Biofuels? A joke. The timeline may
flex a bit–mid-to-long-term but the destination is clear: an energy crisis
is brewing that could dwarf the one the United States faced in 1979-80. |
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| On the bright side, what’s bad for the country
as a whole can be good for you. All you need is your money in the right
place. Bunker and undisclosed location are optional. So what’s the right
place? Let’s start with the big picture – the real one. |
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Simply put, the Earth is
running out of that magic combination of oil that is both high quality
and cheap to extract.
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| Spot events, like rebel uprisings in the oil fields
of Nigeria or hurricanes in the Gulf of Mexico, tend to trigger short-term
fluctuations in the oil market, while seasonal trends push storage levels
of crude and gasoline up and down. The main engine pushing us toward crisis
this time around is a different beast altogether. Simply put, the Earth
is running out of that magic combination of oil that is both high quality
and cheap to extract. |
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| Twenty years ago, a dozen fields produced a million
or more barrels of oil per day. Now there are four, and one of them, Mexico’s
Cantarell in the Bay of Campeche, is collapsing. Mexico’s state-owned oil
company, PEMEX, projects Cantarell’s output will decline 14% per year from
now on. That’s the best-case scenario. 2006 actual production from the
aging field actually fell 27%! |
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| If PEMEX’s worst-case forecast comes true, Cantarell
will soon break below the million barrel a day, leaving the world with
just three million - barrel- a - day fields by the end of this year. |
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| Taking the place of these former big producing
fields are deposits that are complicated and capital intensive. The tar
sands of Alberta, oil shale in America, heavy oil in Venezuela and resources
in the Arctic: all have the potential to add significantly to the world
oil supply. They also point to the real problem. It is not a lack of oil
that will trigger the next oil crisis; it is a lack of oil production capacity.
This is a crucial distinction. Not all crude is created equal and
the long lead-time necessary to ramp up production of such reserves prevents
them from replacing the shortfall created by dwindling conventional (read:
easy and inexpensive to extract) oil supplies. |
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| Simply, non-conventional oil requires a new
paradigm of prices. North Africa’s conventional oil reserves can be
pumped out of the ground for $4 per barrel. But the average cost in the
tar sands is estimated at $28 per barrel, and oil shale costs can be upward
of $40 per barrel. It doesn’t take a genius to see that the more we are
forced to rely upon non-conventional oil, the higher the prices will have
to be. |
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| And you know already that competition to buy that
barrel is only going up. China and India are elbowing their way onto the
global stage, and bidding for their share of Middle Eastern oil. A supertanker
of crude is as popular as a New York taxi at rush hour; everyone is trying
to wave it over their way. |
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One thing is clear: the era
of easy oil is over
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| We’ve reached a turning point in terms of the
supply-demand fundamentals of crude. Even Chevron’s CEO David O’Reilly
recently announced, “One thing is clear: the era of easy oil is over.” |
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| Will the True Price of Crude Please Stand Up? |
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| Your average economist will tell you that once
you correct for inflation, crude prices reached their actual peak in 1980
during the energy crisis spurred by the Iran-Iraq war. From April to July
of that year, a barrel of oil sold for US$39.50. Using the government consumer
price index (CPI) numbers, that record-high price per per barrel is estimated
at between US$90 – US$102 in today’s dollars. |
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| But those CPI numbers are highly suspect. |
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| John Williams of Shadow Government Statistics
(www.shadowstats.com) is one of several specialists who independently tracks
financial data in an attempt to provide a more honest picture of the economy.
Williams recalculates the CPI so that it is more of a continuum with its
earlier versions – unlike the government, which fiddles the formula whenever
it decides it needs to. If nothing else, undoing the many changes in the
CPI formula over the years allows us to compare apples to apples on price
inflation, rather than apples to genetically modified pumpkins. |
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| Track the current CPI the way it was calculated
in 1980, and today's inflation rate is about 7% higher than the current
"official" CPI statistics. So, rather than inflation running at less than
3% as the government would like us to think, based on Williams' calculations
it is really closer to 10%. |
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It turns out that 1980 barrel
of $39.50 crude is the equivalent of over $200 per barrel in today’s anemic
dollars.
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| Casey Research’s chief economist, Bud Conrad,
has confirmed with his own calculations that indeed this figure is a much
more truthful estimate of where inflation actually is. Using shadow
stats, Bud has calculated the oil price history using the 1980 CPI method.
It turns out that 1980 barrel of $39.50 crude is the equivalent of over
$200 per barrel in today’s anemic dollars. |
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| In that context, crude prices are nowhere near
their all time high, and $100 oil still looks to be quite cheap.
With all that is going on in the Middle East today, where the world still
gets much of its oil, and combined with increasingly proof – as per Cantarell
– that peak oil is upon us, the odds are better each day that oil is going
much, much higher. Especially given that oil is currently priced in the
U.S. dollar, and the dollar is headed south in a hurry. |
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| There are other potential shocks to the energy
market lurking in the wings. For instance, faced with the depletion of
Cantarell, how long do you think the Mexican government will continue to
allow the unrestricted export of their country’s oil to the U.S.? We could
wake up as early as tomorrow to find a quota in place. |
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With financials reeling from
the credit crunch, this technical indicator shows that energy stocks are
poised to advance.
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| Energy Stocks in an Energy Crisis |
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| Another way to view the big picture is to examine
the weighting of different sectors within the S&P500 over time. With
his background in advanced mathematics, Casey
Energy Speculator's chief investment strategist, Marin Katusa, has
used this method successfully to assess market dislocations. Simply put,
by looking at the relative size of the various components of the S&P
500 vis a vis each other in modern times, you can fairly readily see when
certain sectors are significantly out of step with historical norms. |
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| Viewing Marin’s chart below, you can see the weighting
of the energy sector grew most during the 1979-80 energy crisis, reaching
a relative peak of almost 30%. Since that time, energy’s share dropped
for two decades since. Only recently, as energy prices have rebounded,
so we again see the band for energy stocks widening again. Even so, other
sectors have increased also, so that while energy stocks occupy a larger
proportion of the S&P 500 than they did in 1999, they are still far
from its former prominence. |
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| Interestingly, the biggest run has been experienced
by the financial sector, which has expanded from 5% to 20% in the last
30 years, catalyzed by the expansion of credit and lax governmental monetary
policies. That trend now appears to be reversing. |
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| It’s also easy to see how the Internet bubble
distorted the stock market. At that time, tech stocks rose to occupy over
one third of the worth of the S&P. During the last energy crisis, the
energy sector grew to a similar size. The current weighting of 9.3% demonstrates
that energy stocks have yet to make their big run. The bull market has
been good to all sectors, with only financials starting to take a hit,
but, as the burgeoning energy crisis gains momentum, energy companies could
very well regain the status that they held in 1979-80. |
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| It’s also worth noting that there is a significant
negative correlation between the energy and the financial services sectors.
They move in opposite directions 79% of the time: that is, as one increases,
the other decreases very nearly four out of five times. Mathematically
speaking, that’s one robust relationship. With financials reeling from
the credit crunch, this technical indicator shows that energy stocks are
poised to advance. |
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The significant gains we’ve
witnessed in certain energy stocks are nothing compared to the runs we
will witness as the next energy crisis comes into full effect.
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| Make the Trend Your Friend |
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| As the petroleum age reaches a tipping point,
the United States, as the world’s largest oil importer, is in an unenviable
position. Individual investors need not be similarly disadvantaged, however.
The first step to protect your wealth is to see the prices of crude oil
and energy stocks in their proper historical context. Ninety dollars per
barrel is not a peak price, for example; it is only a precursor of peak
oil’s influence. |
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| The significant gains we’ve witnessed in certain
energy stocks are nothing compared to the runs we will witness as the next
energy crisis comes into full effect. Crude’s rise doesn’t rely on a new
war with Iran, or a rash move from Venezuela’s Chavez, although any of
these things could speed up the timeline. Crude will move over $100 a barrel,
and probably much further, on the basis of simple supply-and-demand fundamentals. |
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| On any pull backs, smart investors should take
every chance to position themselves in energy companies that possess a
strong growth profile and the other requisites for turning undeveloped
fields into profitable ventures. Many of these companies are still trading
at a discount to their net present value, and it is these investments that
will provide the greatest leverage to energy prices as the next crisis
unfolds. |
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Don't just survive the current
crisis rocking the markets... thrive!
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| Chris Gilpin is a member of the Casey Research,
LLC. energy research team and a contributing editor to the Casey
Energy Speculator, a monthly newsletter dedicated to unbiased reporting
on rational speculations in the shares of small-cap companies targeting
oil, gas, uranium and other energy sources… companies with the very real
potential to offer 100% or better returns over a short time horizon. |
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