Why an Oil & Natural Gas Investment?
Some of the world’s wealthiest individuals and companies made their fortunes in oil and natural gas. Investments in this area has the potential to be very profitable, sometimes generating multiple returns on investment. Oil and gas is also an investment that is particularly timely right now, for some of the following reasons.
1. U.S. domestic oil production increased throughout the 1950’s and 1960’s . Writing in the 1950’s American geologist M. King Hubbert predicted that the production of U.S. oil fields would peak in the early 1970’s. It happened that U.S. production began to decline in 1970. Hubbert’s key insight was that production peaks once half the oil in any field has been extracted. Far more oil is extracted in the early stages of production than later on. In 1970, the U.S. satisfied about 70% of its needs from domestic oil production. Now however, the picture is much bleaker, as the U.S. satisfies about 35% of its needs from domestic production and imports the rest.
2. Since 1969, the North Sea utilizing advanced technology has produced about 15 billion barrels of oil, helping Norway become rich, and Britain to shed its status as a third rate economy. Production in the British sector however, has already started to decline, and Norway is close to peak production. The North Sea has shown that technology is a double edged sword by extracting more oil up front, but hastening the day of reckoning when production starts to decline.
3. Princeton professor Kenneth S. Deffeyes, a colleague of Hubbert, sought to apply Hubbert’s geological precepts on a worldwide basis. Other geologists have made the same effort, and while they don’t all agree on the same year, the general conclusion is that world oil production is now close to peaking!
4. The reserves of the OPEC countries are overstated. Quotas for the members are determined by production capacity, and production capacity is directly related to reserves. In 1988 for example, Iraq announced that their reserves had more than doubled to 100 billion barrels. A miraculous feat despite continued production and the total absence of exploration. The Saudis, Iraq, and Iran have all engaged in overstating reserves.
5. China’s economy is growing by leaps and bounds, and has an insatiable thirst for energy. If China’s per capita energy consumption comes anywhere close to that of the U.S., their need for oil will surpass that of the U.S.
6. Present world oil production is around 77 million barrels per day, and the International Energy Agency projects that world oil production will peak at around 80 million barrels per day.
7. Oil from new exploration, including any efforts to open up the Arctic National Wildlife Refuge, will barely make a dent in our growing need for energy.
8. Oil prices are set to soar! The only question is whether they do so rapidly and abruptly sending the economy and financial markets into a tailspin, or gradually, triggering high and rising inflation.
9. Considering the peak reached in 1981,and adjusting for present demand and inflation, some reliable sources have predicted that oil could reach $100 per barrel by the end of the decade.
10. Natural gas is also in short supply in the U.S. Over the next decade, U.S. demand for natural gas is expected to grow by over 30%. Even after natural gas prices soared in 2000, generating record drilling, natural gas production increased only 2% in 2001, not enough to meet one year’s growth in demand.
11. Alternative energy sources, wind, solar, nuclear etc., are not positioned to replace fossil fuel demand any time in the near future. Coal is not an acceptable alternative because of the environmental problems associated with burning coal. One good sized coal burning electric plant releases enough radioactive material in one year to make two atomic bombs. Not a problem we need in this day and age.
12. Obviously given the current level of drilling activity both in the U.S. and overseas, oil and gas development can be a very profitable investment, at today’s prices. Looking to the future, the financial picture becomes even brighter, and suggests that now more than ever is the time to get involved, and ride the crest of the wave. Contact Western Capital for a free brochure on current and future prospects.
13. In the mid 1990s technological breakthroughs, enabled the industry to evaluate seismic survey data in three dimensions. A 3-D seismic survey, versus a 2-D seismic survey, is rather like looking at a CAT SCAN versus a regular X-RAY. In certain geological formations 3-D seismic can accurately identify accumulations of oil or gas. This has given the smaller independent oil companies the ability to compete with the majors, particularly on the smaller lease plays. In turn this has benefited private capital and the individual investor, by affording the ability to invest in oil and gas prospects, previously considered the domain of the majors.
14. The 1990s also saw technological breakthroughs in the use of horizontal drilling techniques. Horizontal drilling in areas such as the Austin Chalk in Texas, has boosted the production rates of wells, making them more economical to drill, and providing a faster return on investment.
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