Cheap Oil Isn't Coming Back

As the world urbanizes, demand for oil could outstrip many nations' abilities to get it out of the ground. Most new discoveries have been made in difficult territory, where the costs of extraction dwarf inexpensive Middle Eastern crude. Consumers may have to get used to high prices at the pump, with or without the threat of conflict between two of the world's largest producers. There's risk for some, but great opportunity for many, so read on to discover what's happening and who's poised to strike a gusher as oil prices continue to rise.

Hanging in the balance
Saudi Arabia is the world's most prolific oil-producing state, pumping 10.5 million barrels out of the sand every day last year. That figure has been stable for several years, but the Saudi people have actually been using more oil themselves, leading to stagnant to declining production surpluses.

Source: U.S. Energy Information Administration and author's calculations.

These are five of the world's six largest oil producing countries -- Russia is the other, holding steady with about 7 million barrels per day in surplus -- but none of the largest net exporters have substantially improved their balance in the past five years. New and expanded fields in Canada, the United States, Brazil, and other Latin American nations can inject more black gold into the world's veins, but it's unlikely that any can supplant the Saudis in terms of total output. If Saudi output were to decline, it could have dangerous consequences for global oil supplies. Even if Saudi output remains at the same level, it could be a big problem down the road as oil demand keeps increasing.

Fields of black gold
The crown jewel of Saudi oil production is the Ghawar field. The Saudi kingdom closely guards information on Ghawar, but many estimates place the super field's production in the range of 5 million barrels per day, roughly half the country's total output. Ghawar alone produces about as much oil as the nations of India, Oman, Colombia, Argentina, Malaysia, Egypt, and Australia together. It's also been at the epicenter of the peak oil debate for years, as research has uncovered increasing difficulty in getting oil out of Ghawar. Other Saudi fields have also been facing the same issues.

This is important because worldwide oil use has been growing steadily over the past 30 years without a commensurate increase in major new oil field discoveries. The Bakken shale formation, which became an exciting play because of new oil recovery technologies, only produces a tenth as much oil as Ghawar, and does so with greater difficulty. The Canadian oil sands produce about a fifth as much oil as Ghawar.

The harder it comes, the higher it costs
A major problem with most new oil fields is that extraction costs are much higher than they are in fields like Ghawar. Even cheap, easily accessible oil in other places is quite a bit more expensive to get out of the ground than Saudi oil. It's good to have a monopoly, as long as you can keep it running.

Source: News reports and government agency estimations.

The more the world relies on unconventional oil extraction, the less likely it is to ever see cheap oil again. The last substantial drop in prices came when everything else was crashing in 2008. Demand retreated in the midst of economic carnage, but it's a lot easier to manage reduced need than it is to cope with a need that simply can't be met.

Rise of the West
Cheap, easy oil is gone, but demand isn't going to go away. Alternative energy could become increasingly important, but it hasn't reached the point of fueling our transport system yet. Promising new oil fields are the best bet for the medium term and could offer substantial gains as production ramps up while the price of oil continues to appreciate. A number of major new oil projects (that we can invest in, anyway) have been in the Western Hemisphere, and many offer the promise of greater expansion. The Bakken shale area, for example, is hitting a wall not because of extraction difficulties, but because the transportation infrastructure isn't big enough.

Offshore discoveries are a bonanza for Brazil's Petroleo Brasiliero (NYSE: PBR  ) , and for Seadrill (NYSE: SDRL  ) , which is constructing several Brazilian deepwater rigs. ATP Oil and Gas (Nasdaq: ATPG  ) also has numerous offshore operations, though the vast majority are in the Gulf of Mexico. Despite its solid presence, much of ATP's reserves remain undeveloped, so there's still opportunity for growth beyond the expectation of higher oil prices.

Canada's Athabasca oil sands have seen heavy development investment from Suncor Energy (NYSE: SU  ) , and Penn West Petroleum (NYSE: PWE  ) has fields in the Peace River sands. Penn West offers higher yields than most and could be a good play for dividend-hungry energy investors. U.S. petroleum producers are varied, but one lesser-known company with the potential to perform is Samson Oil and Gas (AMEX: SSN  ) , which has two Bakken-area holdings it has yet to fully develop. Another option might be SandRidge Energy (NYSE: SD  ) , which operates in "easier" areas like Texas and the Midwest, and has been investing heavily in the infrastructure needed to ramp up its oil production.

If you'd like the inside scoop on some other excellent oil companies, check out The Motley Fool's analysis of three poised to profit from $100 oil. Find out more about them in this free special report before the rest of the world catches on.

Fool contributor Alex Planes holds no financial stake in any company mentioned here. Follow him on Google+ for more news, observations, and random attempts at wit.

Motley Fool newsletter services have recommended buying shares of Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (26) | Recommend This Article (58)

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  • Report this Comment On October 28, 2011, at 3:50 PM, Nawaralsaadi wrote:

    Thank you for an excellent article, I am a big peak oil believer, and I believe that over time oil companies and the oil price will price in a scarcity value, which will significantly increase the value of companies of large oil reserves in the ground, my top pick large cap is Husky Energy (TSX:HSE), and my favourite small cap is Equal Energy (NYSE & TSE: EQU).

    Regards,

    Nawar

  • Report this Comment On October 28, 2011, at 4:44 PM, dontwin wrote:

    With a 10% dividend and a fleet that is only 4 years old, Sea Drill (sdrl) should carry a price of $40 plus!

  • Report this Comment On October 28, 2011, at 5:27 PM, MrBuzz111 wrote:

    LOL You write this article as oil climbs higher with the overall indices. Where was this article three weeks ago when crude was trading $76/barrel. You weren't so high on it back then were you.

  • Report this Comment On October 28, 2011, at 6:10 PM, EarlRichards wrote:

    OPEC, Libya and the laws of supply and demand are not responsible for high gasoline and oil prices. The oil price is dictated by the fraudulent "round-trip" trades of the "dark pool" trading in the Intercontinental Exchange (ICE) in Atlanta. The international Big Oil/big banking cabal, or an international gang of criminals, owns ICE. The Commodity Futures Trading Commission has no jurisdiction over ICE, influenced by Big Oil. ICE's energy traders and speculators can ratchet-up the oil price anytime they feel like it, for their own profits and on the behalf of Big Oil, through the use of "round-trip" trades. Google the "Global Oil Scam." "Paper oil" and the crude oil futures markets have to be done away with. Over 75% of crude oil futures trading takes place in the ICE. ICE is a super Enron. Oil is too critical a resource to be controlled and manipulated by greedy corporations, greedy speculators, greedy refiners and greedy traders. To obtain a fair oil price, Senators Sanders has to investigate ICE and seize immediately, the trading records of ICE, before they are destroyed.

  • Report this Comment On October 29, 2011, at 7:29 AM, tim443 wrote:

    Great article but I own a whole lot of PennWest and it was never "a master limited partnership". It was an "Income Trust" until 1 January 2011.

    Tim

  • Report this Comment On October 29, 2011, at 12:23 PM, TMFBiggles wrote:

    @ MrBuzz111 -

    I wasn't aware that $76/bbl was considered especially cheap. I wasn't trying to time a price bump with this article, only point out that it's unrealistic to expect prices to ever go back to what they were a decade ago. If anything, I'd consider your post a confirmation, since we're moving the goalposts of "cheap" oil so much further back than they used to be.

    @ Tim -

    You're correct. I regret the error, my apologies.

  • Report this Comment On October 29, 2011, at 12:30 PM, Merton123 wrote:

    The rising price of Oil will help encourage the development of alternative sources of energy such as nuclear. China is in the process of developing small nuclear reactors (the size that can fit into a submarine) for their internal use.

    The most advanced modular project is in China, where Chinergy is starting to build the 210 MWe HTR-PM, which consists of twin 250 MWt reactors. In South Africa, Pebble Bed Modular Reactor (Pty) Limited and Eskom were developing the pebble bed modular reactor (PBMR) of 200 MWt (80 MWe), with similar fuel. A US group led by General Atomics is developing another design – the gas turbine modular helium reactor (GT-MHR) – with 600 MWt (285 MWe) modules driving a gas turbine directly, using helium as a coolant and operating at very high temperatures. All three are high-temperature gas-cooled reactors (HTRs) which build on the experience of several innovative reactors in the 1960s and 1970s.

    Another significant line of development is in very small fast reactors of under 50 MWe. Some are conceived for areas away from transmission grids and with small loads; others are designed to operate in clusters in competition with large units.

    Already operating in a remote corner of Siberia are four small units at the Bilibino co-generation plant. These four 62 MWt (thermal) units are an unusual graphite-moderated boiling water design with water/steam channels through the moderator. They produce steam for district heating and 11 MWe (net) electricity each. They have performed well since 1976, much more cheaply than fossil fuel alternatives in the Arctic region.

    Also in the small reactor category are the Indian 220 MWe pressurised heavy water reactors (PHWRs) based on Canadian technology, and the Chinese 300-325 MWe PWR such as built at Qinshan Phase I and at Chashma in Pakistan, and now called CNP-300. These designs are not detailed in this paper simply because they are well-established. The Nuclear Power Corporation of India (NPCIL) is now focusing on 540 MWe and 700 MWe versions of its PHWR, and is offering both 220 and 540 MWe versions internationally. These small established designs are relevant to situations requiring small to medium units, though they are not state of the art technology

  • Report this Comment On October 29, 2011, at 4:26 PM, bakkenbacon wrote:

    I find this discussion very interesting. If I may let's review some basic economics. If we assume the market for crude oil is a perfectly competitive market then we can draw a downward sloping demand curve and an upward sloping supply curve. Where they intersect is the equilibrium point where the quantity supplied equals the quantity demanded and the price is referred to as the equilibrium price. If you believe this to be so then the market price of WTI or some would say Brent crude oil is the price where the quantity supplied and the quantity demanded are equal.

    My observations of the crude oil markets lead me to believe that market participants seem to be operating as though the market for crude oil is close to a perfectly competitive market. Therefore I believe we have seen a shift in both the supply curve (upward to the left) and the demand curve (upward to the right). These shifts in the curves represent a decrease in supply and an increase in demand. If this indeed has occurred then the equilibrium price is higher than it was before the curves shifted. I think we've been in this situation since the early 2000's.

    Two final comments. First, the demand for crude oil is inelastic as is the supply of crude oil in the short term. What this means in the real word is that demanders and suppliers are slow to change their behavior in response to changes in price. But changes do take place over a number of years. There are many examples to point to. For example, on the demand side the average miles per gallon of the US fleet of vehicles has increased and will continue to increase. On the supply side new technologies like horizontal drilling, long laterals and fracturing technologies have slowed the decrease in the supply of crude oil in the US and energized America's energy economy.

    These changes have been going on for 10 years. If you look back at our last oil crisis which I admit is of a very different nature, higher prices lasted for about 15 years. So we could be 10 years into a 15 year period of high oil prices. I don't believe we are in the same situation this time, however, (this is more about demand, not supply) and this brings me to my second point. The BRIC's--Brazil, Russia, India and China just to name a few emerging economies. Their demand for crude oil and its by-products will make this period of high oil prices last longer than 15 years. How much longer? If I knew I could make all us Fools wealthy.

  • Report this Comment On October 29, 2011, at 6:57 PM, hemifan426 wrote:

    You better hope you are wrong. Oil started the depression and oil will keep us in it. We are not in or near a recession, we are deep in depression and it is time to deal with that and the issues that caused it. I don't believe "easy" oil is gone nor do I believe that there will be a recovery until oil drops off 70 bucks a barrel. Oil is in everything and is leading the hyper-inflationary state the economy is in. There are so many problems and so much denial, but one thing stands true. High oil = a low economy, always has, always will. It is high-time that good alternative energy is produced, but that does not solve the issue of all of the oil derivatives that go into products. It also isn't going to come overnight. Until that issue is solved, jobs come back to the US, the national debt is reeled in and our government either fixes itself (not likely) or fails (likely), America and the world economy will be in trouble. Oil is what will make the economy fly or make it die. High oil spells death for decades, not just weeks or months. Oil needs to be de-listed from the stock exchange and a set price placed on it. Commodities across the board are to high. Commodities are supposed to be cheap, not high. The economy is dying and the future with it.

  • Report this Comment On October 30, 2011, at 12:49 AM, Shawnerz wrote:

    If you are interested in reading about Saudi oil production in and how increasingly difficult it has become to extract oil out of the ground, check out "Twilight in the Desert: The Coming Oil Shock and the World Economy" by Matthew Simmons.

  • Report this Comment On October 30, 2011, at 5:30 AM, Spanishalex wrote:

    Doesn't the discovery of vast shale gas reserves in the US change the game. We may not need to worry about Peak Oil if we have already hit Peak Demand.

  • Report this Comment On October 30, 2011, at 12:00 PM, jrj90620 wrote:

    I believe the price of oil is rising,mainly due to fiat currencies declining.

  • Report this Comment On October 30, 2011, at 3:06 PM, dbtheonly wrote:

    Spanish,

    With 7 Billioin of us monkey-boys around, I don't think were anywhere near peak oil demand. Leaving aside the obvious cars & heating; the need for oil to lubricate all our many machines will keep demand growing.

  • Report this Comment On October 31, 2011, at 11:28 AM, TMFBiggles wrote:

    @ Merton123 -

    Nuclear could be a major generator of energy if most of the world could get over the nagging fear that they might one day be blanketed by radioactive fallout. Not saying that it shouldn't be looked at or that it's a bad idea, but it may not be so easy to convince most politicians to allow a reactor in their constituent backyards.

    @ bakkenbacon -

    You make some excellent points. I agree that the reasons behind this period of high prices differs from the 70's, since much of the problems of the 70's were related to cartels and combat (which would be a great concept for a video game).

    I do think that continued improvements to technology (including alternative energies) will help offset the growing demand for oil -- but projections I've seen call for about 15%-20% increases in both oil supply and demand, with projected supply increases attributed largely to Saudi output. This is something I'd like to go into in a later piece. It's hard to predict the future. Most predictions tend to be wrong.

    @ hemifan426 -

    I saw that argument made several times during my research. High energy prices may contribute to continued slow growth, but there were a number of other major issues that would be silly to dismiss from the list of recession causes.

    @ Shawnerz -

    One of the article's links goes to an older Fool review of that book. Not my review, but I did make some use of the book's excerpts.

    @ Spanishalex -

    Have we hit Peak Demand?

    Thanks for reading, folks.

    - Alex

  • Report this Comment On October 31, 2011, at 3:37 PM, polenium wrote:

    I hope this article was meant to be tongue in cheek. If not, I suggest the author go back the drawing board.

    Oil is expensive not because demand outstrips supplies but because of monopolistic controls and pricing. In the US, four major oil companies control supplies from ground to pump.

    Our government supports this even thought it's detrimental to the economy. The flaccid FEC that are supposed to guarantee abundent and reasonably priced energy supplies shun regulating gasoline prices.

    The many and varied wars in the Middle East have guaranteed even more control by major energy producers over priving and supply. Abundance isn't their concern; extreme profits are.

    These same mega producers are working overtime (again) to slow down the inevitable conversion to renewable energy sources and taxpayers are subsidizing it with tax breaks and other kinds of corporate welfare.

  • Report this Comment On October 31, 2011, at 6:38 PM, dbtheonly wrote:

    polenium,

    You might want to provide some creditable authority for some rather far-fetched claims.

  • Report this Comment On November 01, 2011, at 3:27 PM, bookcase101 wrote:

    Alex-do you believe that certain company(s)-i.e non-oil company(s) and hedge funds that control oil contracts (potentially substantial positions) with no thought of delivery-simply to hold(as they are non-oil company(s)) have an impact and skew real supply/demand of the product

  • Report this Comment On November 01, 2011, at 3:46 PM, oabukovac wrote:

    If you would like to see oil go down in price, our federal government should by automobiles that run on CNG (natural gas, and STOP focusing on alcohol as an energy source for vehicles! http://www.kgoradio.com/Article.asp?id=2068523&spid=3317...

  • Report this Comment On November 01, 2011, at 4:42 PM, ResearchDave wrote:

    It is frustrating that investment professionals as well as governmental scientists are failing or refusing to investigate and fund what may be a game changing energy technology unfolding now. LENR “Low Energy Nuclear Reactions” are real, repeatable, and totally green with no emmisions except for heat and produce no dangerious radiation. This technology not mature by any means but is a real real threat to the established conventional energy companies, especially oil companies. Academics argue that while the energy output is observable and repeatable they simply don’t have a good handle on the nuclear specifics of why it works. QUIT ARGUING! Mankind was cooking on fires before we were smart enough to understand the chemical proccess of oxidation but we still used it.

    We should do the same here.

    Do your own research and decide!

  • Report this Comment On November 01, 2011, at 7:37 PM, TMFBiggles wrote:

    @ bookcase101 -

    Do you mean to ask if I think they have some influence on the price? I don't see investment firms controlling real global supply/demand. That's a function of drillers, refiners, shippers, etc. It's always popular to look for scapegoats when oil rises, and trading activities do influence its price, but to control the underlying availability?

    @ oabukovac -

    Ethanol additives are another matter, but generally speaking the energy cost of corn ethanol production hasn't justified the reduction in actual oil use. At least not that I've seen. If I'm wrong, I welcome evidence to the contrary.

    - Alex

  • Report this Comment On November 01, 2011, at 11:26 PM, nhlfoda wrote:

    Alright almighty list.... enlighten me, as I know nothing about oil other than I find it ridiculous to follow and it pisses me off.

    First we get jacked around on price due to natural disasters

    Second we get jacked around due to supply and demand

    Third we get jacked around due to attacks on pipelines

    Fourth we get jacked around due to the weak dollar..... What gives?!!

    We have no natural disasters and the price goes up

    We have ample supply with weak demand and the price goes up

    There are no attacks on pipelines and the price goes up

    The dollar gains in strength and the price goes up

    Some blame it all on speculators and nothing to do with the above mentioned factors; so which is it?!! I'm confused and frustrated, because every time gas goes up ten cents at the pump, that's another $290 a year out of my pocket.

    Wanna put $200 Billion dollars back in to the US economy instantly?.... drop the price of gas at the pump by one dollar and shazam.... people have money to spend; me personally about $3k extra.

    (Based on DOT registered passenger / Lt Trucks on the road, average 15k miles annually getting and average of 20.3 mpg) Keep in mind this does not include commercial or fleet vehicles.

    So please, before all my hair is gone.... why again are we getting jacked around this week?

  • Report this Comment On November 01, 2011, at 11:28 PM, nhlfoda wrote:

    Please excuse typos.... do, not due. Doh!!

  • Report this Comment On November 02, 2011, at 3:10 PM, DJDynamicNC wrote:

    Trading in a car for riding the bus was my own personal stimulus. I spend $40 on my work commute a month instead of $600. If I go out of town, I take the Greyhound for $60 or $80 round trip, and I only pay that when I actually use it.

    Additionally, all my commute money stays in my city, instead of going to an insurance company in Delaware or a car company in Detroit or an oil company in Texas.

  • Report this Comment On November 02, 2011, at 8:15 PM, TMFBiggles wrote:

    @ nhlfoda -

    You were right the first time, with "due." This week most of the bouncing is probably related to Greece. I like your idea and wish it could be implemented, but I don't see how.

    @ DJDynamicNC -

    I did the same thing. Unfortunately, this isn't a possibility for most people, as nhlfoda brought up.

  • Report this Comment On November 03, 2011, at 1:04 AM, nhlfoda wrote:

    @TMFBiggles

    Suggestion: Since oil companies are always being vilified for their profits and tax breaks already; wouldn't it be nice if Congress and the oil companies could get together, make some deal where the oil companies could over the next ten years write off a large chunk of this loss? In the interim oil companies get the consumers off their back and actually get some good PR out of it.

    During this time consumers have extra money to put back into the economy, we can vote in a new administration, remove many of the regulations preventing us from enhancing our own oil production (sorry EPA, you have no say), not to mention like the X-Project (Space Flight) competition.... we can take some tax dollars and put up a cash prize for producing fuel efficient engines and vehicles that can be mass produced quickly.

    Vehicles that people can actually afford to purchase; not $30k - $40k over priced electric vehicles, which is ridiculous; especially in today's economy.

    Wishful thinking I know..... :-(

  • Report this Comment On November 04, 2011, at 2:26 PM, gimponthego wrote:

    Great stuff..having lived in the Great State over 60 years I've found PER appealing, have purchased shares and believe SandRidge-Permian-Trust to be a winner. Black gold will be attractive for quite a while. J.

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