Think back to July: It wasn't so long ago that you were watching fireworks displays, romping on the beach, or heading off on vacation, was it? But that not-so-long-ago month now seems like the distant past from the perspective of the change that's occurred in crude oil prices. Near $150 a barrel then, black gold has plummeted to below $60, and so we can kiss worries about triple-digit levies goodbye, right?
Wrong! The Paris-based International Energy Agency, the consuming nations' respected watchdog on all things relating to energy, has just come forth with a brand-spanking-new analysis that confirms what you probably already knew: that the crude price dip we're currently enjoying could ultimately be shorter than your Aunt Tillie. After all, the agency says -- and in your heart of hearts, you knew this, too -- we'll soon be squeezed between a dangerous combination of rising demand and sliding production.
This'll only cost an arm and a leg
According to the agency's report, simply keeping up with higher global demand will require the oil companies to spend more than $26 trillion during the next couple of decades, about half of which will be earmarked for power generation and distribution facilities. The rest will be spent by the likes of Chevron (NYSE:CVX) and BP (NYSE:BP) in their ongoing quest to discover and produce new sources of oil. Makes chatter about windfall profits taxes seem like lunacy, doesn't it?
Indeed, the increasing costs involved in drilling for and producing oil from the array of hostile and technically challenging places where it all too frequently is located will be tough to sustain, even for the members of Big Oil. Not long ago, for instance, ExxonMobil (NYSE:XOM) signed a deal with deepwater driller Transocean (NYSE:RIG) for the operation of a new rig that will involve Exxon shelling out dayrates above $640,000.
A better approach
The agency's study employs a different tack from most efforts to predict future energy needs, with essentially all others taking a country-by-country count of likely future demand. This one, however, has approached the subject through an analysis of the reserves and production rates of 800 of the world's oil fields. From my rarely tentative perspective, that's a far more accurate approach in assessing the situation.
As a result, it looks like the world's oil companies will find it necessary to add about 64 million barrels a day to capacity between now and 2030, and that half of that $26 trillion price tag I mentioned will have to be anted up in just the next eight years. Broken down further, the companies will likely spend an average of about $350 billion annually on oil and gas projects in each of the next 22 years. For the sake of perspective, total expenditures for the past seven years amounted to about $390 billion total.
A couple of rubs
And if those numbers aren't big enough for you, we can add at least two major challenges that need to be factored into the world's efforts to keep up with energy demand:
- First, like yours truly, many of the world's largest fields are getting on in years and losing their ability to produce. That's especially true in such non-OPEC places as Russia, Mexico, the U.S., and the North Sea. So, before production can be hiked to match growing demand, there'll be a need to compensate for the world's average annual decline rate of 6.7%, a number that appears to be expanding. It's for that reason that, for example, sizable new discoveries in the deep waters off Brazil by Petrobras (NYSE:PBR) have become so important.
- Secondly, believe it or not, there have been some problems unleashed by the four-month-long slide in oil and gas prices. With lower crude prices, expenditures for big projects become harder to justify. Therefore, in Canada, for instance, which has become the largest importer of crude into the U.S., such big companies as Canadian Natural Resources (NYSE:CNQ) and EnCana (NYSE:ECA) have decided to rein in 2009 spending. It's a trend that could have dire consequences for production from Alberta's prolific oil sands, along with other horizons overseen by our friends to the north.
The key to all this from a Foolish investment perspective is that, while long-term energy studies generally focus on conditions in about 2030, the numbers and trends I've discussed will make themselves felt far sooner than that, perhaps within a year. On that basis, and with most energy names having become cheap, cheap, cheap, I'd suggest that Fools with a bent for energy -- and especially those with somewhat longer-than-normal investment time horizons -- pay careful attention to the sector. Its members could put a smile on your face sooner than you think.
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