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Investor's Revenge: Get Rich on $150 Oil

April 30, 2008



Click here to watch a video of Toby's rant. Or click here to listen.

We're due for a pullback in energy prices, but that doesn't mean it's time to sell oil and natural gas exploration investments. My advice is to be patient, let prices come back to support levels and then be a buyer.

Energy stocks, especially the unconventional resource plays such as North American shale, are headed higher because oil and natural gas prices are headed higher.

This parabolic rise in world crude prices needs a breather, but the underlying supply/demand imbalance is not going away.

Skeptics may point to the most-recent monthly Energy Department report that showed finished petroleum products dropped 8.5% in February from January, and demand for gasoline fell 6.2%.

Some of the decline can be attributed to February being a short month; however, it does suggest that high fuel prices are curbing American's appetites.

But the operative word is "American."

Emerging-market demand is now higher than American demand on a daily, weekly and monthly basis. Oil is a world commodity, and high prices are not slowing the growing demand abroad, which is where the vast majority of new oil demand is coming from.

A Crude Awakening

According to economic theory, rising oil prices have two effects:

1. Reducing demand
2. Inducing new oil production

We are seeing reduced demand in the United States, but the oil we would have bought is just being sold to emerging markets, such as China and India, or being kept in the Middle East.

Furthermore, most oil-producing regions are running out of reserves.

New oil production is not offsetting real reserve declines, and it hasn't done so for the past 20 years.

* Norway's production in the North Sea is down 25% since its peak in 2001.

* In Britain, oil production has fallen 43% in eight years.

* Mexico's giant Cantarell oil field is producing about 20% less oil now than it did just two years ago, and Mexico is the second-largest exporter to the United States.

* Alaska's oil production in the giant field at Prudhoe Bay has declined 65% since the late '80s.

* Iran and Iraq are producing significantly less oil than in previous years.

* Venezuela's production is also declining.

The bottom line: We're seeing no growth in reserves.