AMERICA'S OIL CRUNCH
By John Myers
There is a new Middle East taking shape - one filled with
Muslim extremism, teetering sheikdoms, and perhaps falling
governments. It is a Middle East that could send oil prices
soaring.
The recent bombing in Saudi Arabia underscores just how
shaky this region is - an area that holds two-thirds of the
world's oil. And while America's occupation of Iraq may
have given Wall Street a temporary high, the hangover could
be devastating. We anticipate a hangover that features
stubbornly high oil and natural gas prices.
Many investors will recall that high energy prices were a
major part of the equation that made the 1970s one of the
worst decades on record for stock investors. Well... the
oil market of 2003 may not be so different from the oil
market of 1973. One important difference, however, is that
the United States relies far more heavily on foreign energy
supplies today than it did 30 years ago...and that's not a
good thing.
In his book, Jihad vs. McWorld, Benjamin R. Barber writes:
"The world still spins on the energy of fossil fuels - non-
recyclable and irreplaceable. The United States represents
an especially foreboding case study, for here is one of the
world's richest countries using up its own resources in an
orgy of consumption that's reflected neither in elevated
living standards nor in proportionately larger GDP. Nor
have we learned much from two major crises in supply and
our ever more debilitating dependency on foreign oil..."
The United States is a geological pincushion. More oil
wells have been drilled in the continental United States
than the rest of the world combined. Yet, U.S. oil
production continues to decline with each year, resulting
in less and less domestic production.
Consider the following facts:
* The United States accounts for less than 4 percent of the
world's oil production, but consumes more than 30 percent
of world oil supplies.
* Since 1970, U.S. crude oil production has declined by
nearly 50 percent, falling from 11.3 million barrels per
day (mb/d) to 6.1 mb/d. Over the past few years, U.S.
production is declining at a rate of 4 percent per year.
* Since 1970, U.S. oil reserves have fallen by more than 40
percent, or from 38 billion barrels to 22 billion barrels.
* The average oil well in the continental United States
pumps about 300 b/d. The average well in the Middle East
produces 10,000 b/d.
* Of the 530,000 operating oil wells in the U.S. in 2000,
78 percent were "stripper wells," each of which produced
less than 10 barrels per day. These wells accounted for 0.3
billion barrels of production in 2000, or about 15 percent
of total U.S. crude oil production.
* The last elephant oil field (more than a billion barrels)
discovered in the United States was in Prudhoe Bay, Alaska,
which elevated U.S. crude production for nearly two
decades. Now, as Prudhoe Bay empties out, domestic crude
production is set for a steep decline.
* For the Lower 48 States, the apex in the oil discovery
rate was hit in 1957. U.S. proven oil reserves peaked five
years later in 1962. Another decade later, U.S. oil
production peaked. Since then, America has come to depend
on ever-greater amounts of foreign oil.
"Oil reserves have fallen so far to the point that annual
U.S. oil consumption is now equivalent to about 1/4 of
total proven reserves," writes the Hubbert Peak of Oil
Production (http://www.hubbertpeak.com/us/). "This means
that, if the U.S. had to supply its own oil, and no new
discoveries occurred, its oil would be gone in four years!
By importing 55 percent of its oil, the inevitable is being
postponed. But for how long can this continue?"
Indefinitely, as long as the U.S. government can guarantee
available and cheap oil supplies delivered from the Middle
East. If it cannot, then the United States faces severe
challenges for the future.
America is heavily addicted to foreign crude oil. Of the 78
mb/d that the world consumes in petroleum, the United
States siphons off almost 20 mb/d. Even though new
technologies have reduced petroleum use on a per-capita
basis for the United States, our SUV-loving population
consumes ever-increasing amounts of oil. With America's
largest oil pools in severe decline and little expectation
that any significant oil fields remain to be discovered,
the United States is quickly heading towards a future where
it will import two-thirds of the petroleum it burns.
Oil dependency also means that the U.S. is vulnerable to
supply interruptions from Mid East wars or striking oil
workers. How high will the oil price go? That, too, depends
largely on what happens in the Middle East.
The signs are not promising. Saddam Hussein was a cruel
leader, but for many years the United States tolerated him
because, in a perverse way, he helped stabilize the region.
And a stable Middle East is an oil-producing Middle East.
With him gone, the United States must try to create
stability in the region. This will probably prove to be an
impossible task. After all, the American peacekeeping
mission was driven out of Beirut. How can we hope to bring
stability twenty years later to Iraq?
During the 1991 Gulf War, oil prices rose above $40 a
barrel. Adjusted for inflation (as measured by changes in
the Consumer Price Index), $40 in 1991 translates to about
$60 in 2003. Civil strife in the Arab world could propel
oil prices above $50 a barrel range. Large-scale civil
strife in Saudi Arabia, could send the oil price rocketing
as high as $100 a barrel.
Skyrocketing oil prices would bring far more harm than good
to the economies of the world. But there is a silver
lining: investors can profit from rising oil prices. Even
if the Middle East somehow manages to become an oasis of
tranquility and harmony, the bull market in oil is just
beginning. Global oil supplies are running down - even in
the OPEC countries - while global demand continues to
escalate.
We hope that the smoldering geopolitical bonfires in the
Middle East do not erupt into a conflagration. We hope for
peace in the region, but we do not expect it. So we suggest
you prepare your portfolio for escalating civil strife and
terrorist activity in the Middle East. Prepare to profit
from a volatile bull market in crude oil by buying a basket
of carefully selected oil and gas stocks. |
