Invest in oil or in gas

ome of the world’s wealthiest individuals and companies made their fortunes in oil and natural gas. Investments in this area have the potential to be very profitable, sometimes generating multiple returns on investment. Oil and gas is also an investment that is particularly timely right now, for some of the following reasons:

 

1. U.S. domestic oil production increased throughout the 1950’s and 1960’s. Writing in the 1950’s, American geologist M. King Hubbert predicted that the production of U.S. oil fields would peak in the early 1970’s. It happened that U.S. production began to decline in 1970. Hubbert’s key insight was that production peaks once half the oil in any field has been extracted. Far more oil is extracted in the early stages of production than later on. In 1970, the U.S. satisfied about 70% of its needs from domestic oil production. Now, however, the picture is much bleaker, as the U.S. satisfies about 35% of its needs from domestic production and imports the rest.
2. Since 1969, the North Sea utilizing advanced technology has produced about 15 billion barrels of oil, helping Norway become rich, and Britain to shed its status as a third rate economy. Production in the British sector, however, has already started to decline and Norway close to peak production. The North Sea has shown that technology is a double-edged sword by extracting more oil up front, but hastening the day of reckoning when production starts to decline.
3. Princeton professor Kenneth S. Deffeyes, a colleague of Hubbert, sought to apply Hubbert’s geological precepts on a worldwide basis. Other geologists have made the same effort, and while they do not all agree on the same year, the general conclusion is that world oil production is now close to peaking!
4. The reserves of the OPEC countries are overstated. Quotas for the members are determined by production capacity, and production capacity is directly related to reserves. In 1988 for example, Iraq announced that their reserves had more than doubled to 100 billion barrels. This was a miraculous feat, despite continued production and the total absence of exploration. The Saudis, Iraq, and Iran have all engaged in overstating reserves.
5. China’s economy is growing by leaps and bounds, and has an insatiable thirst for energy. If China’s per capita energy consumption comes anywhere close to that of the U.S., their need for oil will surpass that of the U.S.
6. Present world oil production is around 77 million barrels per day, and the International Energy Agency projects that world oil production will peak at around 80 million barrels per day.
7. Oil from new exploration, including any efforts to open up the Arctic National Wildlife Refuge, will barely make a dent in our growing need for energy.