This is What "Peak Oil " Looks Like for Investors Today

Just in time for the start of the summer driving season: Oil at $130 a barrel and gas getting closer to an average of over $4 a gallon. Crude prices spikes to yet another trading high as supply concerns mount. At filling stations across the country, the national average price for a gallon of regular gasoline passes $3.80 for the first time, having followed oil's spectacular rise.

The Super Major Oil Production Companies Are Not Replacing Their Reserves

Never have so many oil and gas companies spent so much to produce so little. At the same time as consumers face record gasoline prices, investors salivate at the rise in analysts forecasts for the commodity price. Replacing the daily " draw " of their reserves is the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a record $98.7 billion this year on exploration and production, Lehman Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material. The leading example of the world's largest oil producer Exxon illustrates the giant problem and the giant profits . Exxon pumps out 4.5 million barrels of oil a day. It must find the same amount as it pumps out or face decline. In 2006, 2007 and now in 2008 it has not replaced as much as it depletes.

OPEC is Not Meeting the Demand

New supply from outside OPEC nations will meet about 20 percent of growth in world demand during the next four years, data from the International Energy Agency show. The lack of supply has traders betting oil will remain at about $120 a barrel for at least eight years, according to futures on the New York Mercantile Exchange. The wagers are buttressed by delays at fields including Kashagan, a Kazakh deposit where the budget has more than doubled to $136 billion and the first production is eight years behind schedule. Waters frozen half the year forced contractors to build artificial islands, while care must be taken to protect workers from deadly hydrogen sulfide fumes emitted by the wells. The future is going to be very trying for the international oil companies,'' said Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. There's no more easy oil for them. Kashagan is a shining example of the problems they face bringing new oil into play.''

$200 Oil - Goldman Sachs Prediction

The failure to develop new energy sources may drive crude to between $150 and $200 a barrel within two years, Arjun N. Murti, an analyst with Goldman Sachs Group Inc. in New York, predicted in a May 5 report. Oil in New York closed at $126.29 a barrel on May 16, four times the price in 2003.

UBS Price Forecasts Raised

The price of a barrel of oil will average US$115 in 2008, US$120 in 2009 and US$116.50 in 2010, according to UBS, which dramatically hiked its forecasts for West Texas Intermediate (WTI) crude to a level now 25% above consensus for this year. “We are abandoning the idea of a near-term collapse in oil prices under the weight of a U.S. recession,” UBS analysts told clients. The primary factor behind their bullish stance is the global energy market, with real demand growth for several key oil products rising this past winter, along with constrained supplies. “The resultant tension on oil markets has not yet abated, while stress may continue to intensify this summer - and in any case should continue to play out again next winter,” the firm said in a report. It doesn’t anticipate any correction in oil prices until the middle of 2009. UBS also boosted its normalized natural gas price to US$9 per mcf from US$7.25. Its analysts expect natural gas will be more volatile as North America plays a bigger role in the global market. In fact, the price range could be a wide as US$7 to US$14 per MMBtu. “We believe improved domestic natural gas demand trends, soaring coal prices and likely increases in the cost of electricity generation, and increased competition for LNG from the Asian Pacific region is driving natural gas prices upwards,” they said.

UBS Top Picks :

A ) Large Caps

Canadian Natural Resources Ltd., Talisman Energy Inc. and Nexen Inc. are the top large cap picks at UBS,

B ) Juniors

Galleon Energy Inc., Petrobank Energy and Resources Ltd., UTS Energy Corp. and OPTI Canada Inc. among junior explorers and producers.

C ) Energy Trust Picks

Crescent Point Energy Trust, Baytex Energy Trust and Vermilion Energy Trust are its top picks in the energy trust space.

Higher Prices are Here Today and Tomorrow - Options Forecast

Options contracts that allow buyers to lock in crude at $200 a barrel and expire in December on Nymex have soared more than ninefold since January. Oil companies are turning to more technically challenging fields as oil-rich nations limit access. Russia is taking control of BP's stake in the Kovykta gas field, a deposit in east Siberia big enough to supply Asia for five years. Algeria has imposed a profits tax, and Venezuela seized four oil ventures from companies including Exxon Mobil and ConocoPhillips a year ago.

Something Different

Drillers could access only 7 percent of known world reserves in 2005, down from 85 percent in 1970 after Middle Eastern nations took control of their fields, according to a July report by the National Petroleum Council in Washington. The 13 members of the Organization of Petroleum Exporting Countries 9 OPEC) held 919 billion barrels of oil as of 2006, or 76 percent of proved global reserves, according to BP. Add Russia, the world's second-biggest producer, and the total rises to 83 percent.

High Prices Have Not Produced More Supply

Normally, high prices would mean higher supply,'' said Fadhil Chalabi, executive director at the Centre for Global Energy Studies in London and a former Iraqi oil ministry undersecretary. What is happening is something different. The international companies are denied access to areas of abundant oil within OPEC, and it's getting costlier in other areas.'' Even as countries reclaim their reserves, many are relying on high oil prices rather than increased production to meet government budgets. Output in Russia is expected to fall for the first time in a decade, and Saudi Arabia's decision this month to increase output by 300,000 barrels a day still won't offset a 390,000 barrel-a-day drop in monthly OPEC production in April.

For The Apprentice Millionaire Portfolio The Lesson is Consumers Pay - Investors Profit

Consumers are paying for the failure to find more crude. Gasoline cost an average $3.732 a gallon at the pump in the U.S. on May 12, a record then, according to the AAA. It takes $220,000 to fill a Boeing 747 with jet fuel, about double the price a year ago. The international oil companies cannot dictate the tempo any more,'' said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. They can try projects that didn't work two years ago, but it's not a question of money. They don't have access to resources.''

Lower Oil Prices? - Only when the World Economy Stops ( Not Likely)

Only a deep'' recession will act as a brake on record oil prices in the absence of extra supply from OPEC and nations outside the producer group, the Centre for Global Energy Studies said. It is difficult to believe that the world is well supplied'' as global oil inventories were depleting at an average rate of 800,000 barrels a day last year, London-based CGES said in a report today. Output from non-OPEC countries in the first quarter is about 300,000 barrels a day lower than a year earlier, it said. If the OPEC member-countries will not boost production, then, in the absence of non-OPEC supply growth, only a slowdown in demand will remove the upward pressure on oil prices,'' the CGES report said. In short, a recession that is deep enough and wide enough to affect oil consumption in the developing countries of Asia as well as the developed ones of the OECD.''

Where Do Investors Turn to Profit from Peak Oil

Even though the super majors like Exxon and Chevron are not finding new supplies fast enough they are profiting from ever higher prices. The Canadian oilsands offer increased production in a politically stable country . For one example Suncor Energy has production today of approximately 260,000 barrels of oil (BOE) . That production will be increased by two expansion projects to a 500, 000 BOE level in 2012. You can do the math . An added bonus to investing in oilsands producers is the likely buy out by the super majors as a relatively easy way to replace their own reserves. They certainly do not lack the capital at today's prices. Junior producers like Oilexco ( OIL on Toronto ) have a greater leverage to the commodity price because they do not have the lesser profit centres of refining and gasoline distribution. Oilexco has a present production of 21,000 BOE , from the North Sea -set to rise to 45,000 by the end of the year and to 100, 000 by the end of 2010.

The Bottom Line For Investors

The long lead times to find and develop new oil supplies - if they can be found - means high prices for years to come . The bad news for consumers spells opportunity for investors.

Jack Bass, B.A. , LL.B. is the autor of several books on investing. his new book is " Building Your AMP Portfolio ". His stock market letter, The Apprentice Millionaire Program is the basis of his seminar programs.
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