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Stock Ideas Investors Daily Edge Can Big Oil Find Ways to Grow?
Stock Ideas Investors Daily Edge Can Big Oil Find Ways to Grow? 
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Dear Reader, The vote was unanimous: 5-to-0. And, with the swing of a gavel, a United Nations international court settled a seven-year border dispute, handing a tiny Canadian company the rights to a potential $1.35 trillion fortune. |
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| Can Big Oil Find Ways to Grow? |
| Tuesday, 11 November 2008 | ||||||||
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Strange things are going on in the oil patch. They could help make Obama look good. But what's good for Obama may ultimately give the U.S. its biggest energy headache yet. As oil continues its dizzying fall, cheap energy and gas will allow Americans to spend more on other things. But oil companies aren't happy and are reacting in different ways. Some, like ExxonMobil, are continuing their spending plans. For ExxonMobil, that would be a tidy $25-30 billion a year. Most of the other oil majors are cutting back – especially on spending in higher cost and/or non-conventional oil development initiatives. Having just enjoyed another quarter of record or near-record breaking profits, these companies certainly have the money to spend. Oil companies may not be as vulnerable to the economic crisis and credit crunch as car manufacturers, but the good ol' days are rapidly coming to a close. Oil for the year is still averaging over $100 a barrel. So on the surface, oil companies are doing fine. But dig a little deeper, and some cracks begin to show. Until recently they've been fighting rising costs. Costs of raw materials like steel and cement have now fallen back to earth. But labor and drilling remain stubbornly high. And production in existing fields is declining faster than expected. For example, oil is flowing from the North Sea at a clip of 1.7 million barrels per day. By 2030, it'll drop to only 500,000 barrels. Production from existing fields in Alaska, Russia and Mexico are also suffering faster-than-expected declines. A new report from the International Energy Agency says that oil companies will have to spend $360 billion per year just to keep this rate of decline at 6-7 percent over the next two decades. Otherwise, rates will climb over nine percent. That's a lot of money to spend on a losing battle. All that spending won't reverse rates. It will just slow down falling production. The same agency noted that oil output outside of OPEC countries has plateaued already. And it will begin to drop in a few years.
There will be individual companies in the West that will be increasing production – especially companies working the smaller oil plays. But the future for the bigger oil companies and for western oil companies as a group is grim. With each passing quarter, their ability as a whole to maintain production levels will come under increasing pressure. Raising production is simply off the table. Ain't gonna happen. It would seem that Obama's unfriendly stance toward oil companies (like plans to tax windfall profits) is particularly backward-looking. Oil companies are in a heap of trouble. Oil companies haven't figured out how to counteract declining prices combined with declining production. What can they do? They could follow Royal Dutch Shell and put more money into developing non-conventional oil resources, like the vast reserves of oil sand in Canada. Shell, along with Suncor, Petro Canada, Imperial Oil and a half-a-dozen other companies are delaying new projects or cutting back on their spending in Canada, though. The problem? Some of these oil companies swear it's more a concern over rising costs than the falling price of oil. But c'mon. The Canadian oil sands are a big money-maker when oil was at $145 a barrel. It would be a profitable operation even with oil at $100. But at $65? Or $55? That's cutting it far too close for comfort. Here's the kicker, though. Any increase of oil production will have to come from OPEC countries. Countries in the West – including the U.S., of course – will be more dependent than ever on OPEC to satisfy their oil thirst. And there's not a thing an Obama presidency can do about it. Even if he pushes hard on energy conservation and using more alternative energy resources, it's not going to change the fact that availability of our most important fuel will depend on OPEC countries making timely decisions on raising output. Over the long run, moving away from oil is a good move. But there's only one thing that will keep the price of oil down in the short run and that's a deep and prolonged global recession. Once countries like China and India (where most of the growth in oil demand will come from) start to bounce back, the price of oil will begin a long climb up. And given that oil companies in the meantime will be making much less money and, as a result, spending much less money on developing new production, a new round of oil shortages will develop... That is, unless OPEC countries raise production enough to keep prices low. And that's a non-starter if I ever saw one. So expect oil to climb to new heights after a 2-3 year pause that has just begun. It'll easily pass the previous high of $147 reached this July. It should hit $200 and could go higher. The big oil companies in the West will benefit greatly, even if their production is flat-to-falling. And those big bets that companies like Suncor, Nexen, Opti Canada, and Petro Canada have made in the Canadian oil sands will be looking a lot better. You may want to keep in mind that among the super-majors, the company with a big lead in non-conventional oil development is Royal Dutch Shell. It's not the best-looking super-major now. But by the time Obama is campaigning for a second term, that could well change. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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