Gold and Energy Advisor: Gold, Oil & Energy Markets Investment Research
James DiGeorgia, Mr. Macro
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Real Wealth

Real Wealth #005  12/29/2005



The Truth About Global Oil Supply

In the last issue of the Real Wealth e-letter, we talked about the importance of oil prices on the market — and on your investments.

 

To continue with that theme, I'd like to share with you a bit more from my book, The Global War For Oil: A Survival Guide to the Coming Energy Shock.

 

This passage deals with the global oil supply — and how the reality of the situation is much more serious than many people would have you believe...

 

"At current levels of consumption, there are sufficient reserves to meet oil demand for some 40 years and to meet natural gas demand for well over 60 years."

           

The Lord Browne of Madingley,

Chief Executive of British Petroleum

 

"What people need to hear loud and clear is that we're running out of energy in America."

 

President George W. Bush

 

The Chief Executive of an international oil company has said there's enough oil to last us 40 years, even if we don't find another drop.  The Chief Executive of the United States has said there isn't.

 

Who's right?

 

There are many people on both sides of the issue.  On the one hand, there are many optimists who proclaim that we have another 40, 50, even 90 years of oil.  They back up their statements with impressive statistics.  On the other hand, a large (and growing) number of analysts are sounding the alarm — warning that we're about to run out of oil and other forms of energy.  They claim the numbers back them up, too.

 

Both groups are right...and wrong.

 

The optimists are right — and the doomsayers are wrong — in that we'll probably still be pumping oil out of the ground 40 years from now.  But the doomsayers are right — and the optimists wrong — in recognizing we're on the verge of a permanent shift in the energy markets.  We'll still have oil to pump from the ground, but it will be far more expensive than today.

 

Here's the correct way to describe out situation:

 

We're about to run out of cheap oil...and the impact will be devastating!

 

The optimists, or "Pollyannas" (as I'll call them), like to point to a 40-year oil supply that's already been discovered, waiting to be pumped out of the ground.  Plus, they're hopeful to find large amounts in new fields.  But the truth is, our "40-year oil supply" is grossly inadequate.

 

Let's take a moment to understand where the Pollyannas get their numbers.  Currently, the world is producing — and immediately consuming — about 30 billion barrels of oil each year.

 

Known oil reserves in the world are claimed to be about 1.2 trillion barrels.  Dividing 1.2 trillion by 30 billion means the world can maintain current production levels for another 40 years or so.  (This is called the R/P, or reserves-to-production, ratio.)  Therefore, we have enough oil for at least 40 years.

 

Or do we?

 

As it turns out, the Pollyanna viewpoint sounds very reasonable and matter-of-fact.  But it rests on six major assumptions:

 

  1. Constant oil production from existing oil fields.
  2. Constant demand from oil users.
  3. Constant supply of the most desirable types of oil.
  4. Oil fields will be unaffected by maximum production rates.
  5. Reserve estimates are accurate.
  6. Oil-producing countries are politically stable.

 

If any one of these assumptions is wrong, the Pollyanna case collapses...and we'll have a lot less time than they think.  The time shrinks further with each incorrect assumption. 

 

And in my book, The Global War For Oil: A Survival Guide to the Coming Energy Shock, I show you precisely why each one of these assumptions is flat-out wrong, spelling flat-out doom for their optimistic scenarios.  We have much less oil than we think, it's not going to last us very long, and much of the oil that we do have is going to be unusable or unavailable.

 

Shallow analysis methods like reserve-to-production methods are misleading.  They sound impressive, but ultimately they're hollow.  Indeed, they're dangerous, because they've lulled our society into a false sense of security about the availability of oil.  Even worse, because they sound scientific, anybody trying to explain the truth is derided as a Chicken Little.

 

 

Best Wishes,

 

[Signature]


James DiGeorgia
Editor
Gold and Energy Advisor

 

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