Why Death of Peak Oil Still Won’t Mean Cheap Crude Oil Prices

David Zeiler writes: Today (Wednesday) an analyst from Citigroup became the latest lemming to declare the death of peak oil.

In a report entitled “The End is Nigh,” Seth Kleinman says a combination of flattening demand and rising supply will cause oil prices to slide slightly by the end of the decade to $80-$90 a barrel.

But while oil companies have made many large new discoveries over the past few years, including big shale oil finds in North America and Australia as well as deepwater finds in the Gulf of Mexico, that doesn’t mean oil prices will fall.

In fact, according to Money Morning Global Energy Strategist Dr. Kent Moors, it’s far more likely that oil prices will continue to rise over the next decade.

Moors points out what most other analysts seem to be missing – that all of the new oil finds present many challenges that will add to the cost of extraction.

“None of this new volume is light, sweet crude,” Moors said. “The average wellhead costs continue to go up, and that moves its way downstream to processing, wholesale, and retail.”

Why We Keep Hearing About the Death of Peak Oil

First of all, the whole concept of “peak oil” was based on the belief that the amount of oil the world could extract from the ground had topped out and would start to decline.

The falling oil supply, combined with rising demand from a growing global population as well as rapidly developing economies in places like China, India and parts of Africa would, the theory went, drive oil prices sky high.

But in recent years, a combination of technological advances and discoveries of vast new reserves have led many to declare the death of peak oil and confidence in the ability of oil producers to meet increasing demand.

Even oil industry leaders have joined the chorus…

“There hasn’t been much talk of “peak oil’ lately,” BP plc (NYSE ADR: BP) CEO Robert Dudley said at an energy conference earlier his month.

Although Dudley said he believed demand for oil would increase by about 18%, or 16 million barrels a day, he said “new frontiers such as shale and deepwater” would be able to meet that rising demand.

Those who see the death of peak oil have plenty of evidence, at least as far as increased production goes.

Thanks to the shale oil boom, production in the U.S. alone has risen about 25% in the past four years.

And deepwater discoveries off the coasts of Brazil, West Africa, and in the Gulf of Mexico over the past four years have been double the average of the previous decade.

Why Oil Prices Must Rise

However, as Moors point out, the technology that enables the extraction of shale oil, or the drilling for oil deep in the ocean, is very expensive. It only makes economic sense to extract that oil as long as prices remain high.

“With the largest new deposits uncovered, 50% or less of what is known to be there can be brought up because of geological, technicaland reservoir configuration/pressure considerations,” Moors said.

In fact, some of the more recently discovered oil reserves have so many expensive complications including poor grades and insufficient local infrastructure, that they’re not economical at $100 a barrel or anything close to it.

“If we are at $200 a barrel, everything is fair game. But that is hardly the market we are looking at,” Moors said.

Furthermore, he said, many people misunderstand that the prime drivers in today’s oil markets are no longer the United States and Europe, but China, India, East Asia, and Africa – and in those areas, oil demand will spike as their economies grow.

“The simplistic view of equating potential supply with depressing prices, therefore, is hardlythe case. This is not somepeak oil issue,” Moors said. “Yes, new volumes are becoming available, but because of the factors I’ve described, the costwill still be rising.”

In short, all these new discoveries may indeed spell the death of peak oil, but are no panacea for the oil market.

The good news for investors is that higher oil prices should translate to higher profits for many companies involved in the oil industry.

“The trick is to invest into the dynamic not against it,” Moors said.

One area Moors has pinpointed for profit potential is the Coober Pedy basin in Australia, which is said to have $20 trillion of oil and gas reserves – nearly as much as Saudi Arabia. To find out more about Coober Pedy and opportunities like it, click here.

Money Morning

