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Physician's Money Digest
April 2007
Volume 14
Issue 4

Why Oil Prices Will Continue to Explode

Author(s):

With the exceptionof water, oil is themost importantcommodity in theworld. Since itsfirst commercial use in the mid-1800s,we've burned almost a trillion barrelsof the stuff. And we burn another 84million barrels each day. One hundreddollars for a barrel of oil is a scarythought—so scary, most analysts are incomplete denial. But, it's inevitable.

Having Less Oil Than We Think

The oil industry says we have about1.2 trillion barrels of extractable oil inthe ground. But this is almost certainlya gross exaggeration. Petroleum reservesare self-reported by oil-producingcountries, and there's no way toverify these numbers.

Petroleum

Intelligence Weekly

Royal Dutch/Shell was forced in2004 to slash its reported reserves by23%—and another 10% or so recently.Chevron Texaco, ExxonMobil, Total,and Italy's ENI also appear to haveexaggerated their reserves. recently publishedreports about Kuwait's national oilcompany purporting that its reservesare about half of what's claimed.

The world burns up 30 billion barrelsof oil each year. The oil industry needs tofind that amount in new discoveries,plus a few million more barrels to offsetincreases in consumption. But they'reonly finding a fraction of that amount:3 billion to 7 billion barrels a year.

It's not that they aren't looking.ExxonMobil alone will spend an estimated$19 billion this year on oil discoveryinitiatives. Unfortunately, all ofthe big oil fields were found decadesago. The world's 19 largest fields producean average of 500,000 barrels perday, with an average age of 70 years inproduction. Of the hundreds of fieldsfound since 1980, only three produce200,000 barrels per day.

When you first drill a well, the oil isunder a lot of pressure, and comes outfast, easy, and cheap. But after a while,the pressure decreases and you have tostart pumping. You still can extractplenty, but now it comes out slowerand costs more. After that, you'reforced to pump water into the field toforce more oil out of your extractionwell. At this stage, you're getting a lotless oil, and each barrel is much moreexpensive. This gets worse every yearuntil the field becomes unprofitable,and it's abandoned. Oil insiders callthis "depletion." The world's biggestoil fields are all old and starting todeplete rapidly.

Petroleum Review

According to , theworld is now losing more than a millionbarrels of oil per day to depletion—twice the rate of 2 years ago.And the decline rate is accelerating.Though we have billions of barrels ofoil left in the ground, fewer barrels eachyear can be brought to market.

As our oil supply is depleting, consumptionis skyrocketing. Increasingconsumption is a worldwide phenomenon.Oil consumption has increasedevery year since people started usingthe stuff over 100 years ago. As thechief executive of Kuwait PetroleumCorp recently said, the era of cheap oilis gone forever.

Global Supplies Are Unstable

We used to look to fields in Texas,the Gulf of Mexico, the North Sea, andother peaceful places for our oil, but nomore. Those fields are depleting rapidly.

Now we have to look to othersources. Unfortunately, 83% of theworld's oil is in only 10 countries, andmost of these countries are not stableplaces. As seen in the Table above, the"Political Risk" column contains a ratingfrom global insurer AON Corp.Note that 8 of the top 10 oil countriesare rated as medium risk or worse.Overall, more than 75% of the world'soil is in countries rated as unstable.

As our oil supply is sinking, demandis shooting up. This means permanentlyhigher prices. We're at the beginningof a major shift in the markets. Theseshifts come along just once or twice ageneration, and can be obscenely profitablefor those who play it right.

James DiGeorgia is editor and publisher ofthe Gold and Energy Advisor Newsletter(www.goldandenergyadvisor.com) and theauthor of the popular books The New BullMarket in Gold and The Global War for Oil.

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