Peak Oil: Sell oil stocks?

Justice Litle - Mon 23 Oct, 2006

...Has global oil production actually peaked? And if so, how should investors respond?...

 
 
- A few months ago we posed the question "Does Peak Oil Matter?" In other words, has global oil production actually peaked? And if so, how should investors respond?

- We posed this question in the context of the fact that North America oil shale holds billions of barrels of "theoretically" recoverable oil. Theoretically, therefore, global oil production may not have peaked.

- We are sceptical.  

- We doubt that US oil shale deposits will be yielding their bounty anytime soon. There are just too many impediments – logistical, political and environmental - to make that happen in the near future.   

- But what about the Athabasca region of Canada? America's northern neighbour has Saudi-sized reserves in the form of oil sands. These oil sands are already producing one million barrels per day.

- The "Peak Oil" sceptics place a great deal of hope on nontraditional sources like Athabasca. The most hopeful estimates suggest Canada's oil sands output will eventually hit 10 million barrels a day. But how to get there from here...

- Ah, there's the rub.  

- One of the biggest inputs in the oil sands recovery process is natural gas. To get oil out, you have to put natural gas in. LOTS of natural gas. In a fascinating piece from CNNMoney entitled "Curing Oil Sands Fever," energy economist Peter Tertzakian observes that "It takes the equivalent of 0.7 barrels of oil to create one barrel of oil sands product."   

- Tertzakian's equation refers to "energy equivalents." In the process of extracting and refining the oil sands to make light sweet crude, other forms of energy get used up. And unfortunately, much of what gets used up is clean-burning natural gas.

- "What bugs me about oil sands," says Marlo Raynolds, executive director of the Pembina Institute, an environmental research group based in Calgary, "is that it is a resource that is being inefficiently used. We're using natural gas, which is the cleanest fossil fuel, to wash sand and make a dirtier fuel. It's like using caviar to make fake crab meat."

- The process also requires huge amounts of water. You've no doubt heard about the water crisis. Well, guess what: If oil sands are the answer, then the North American water crisis is about to get a lot worse. Athabaska cannot ramp up its oil sands production without encountering formidable water challenges.  

- But let's go back to natural gas for a second. In order to really ramp up oil sands production, Canada will eventually have to become a net IMPORTER of natural gas. Think about that. Natural gas is another area in which the energy optimists really have their "heads in the sand," pun intended.

- North American natural gas wells are already in pronounced decline. If we hope to solve our oil crisis by ramping up oil sands production tenfold, we're only going to increase the burn rate of natgas dramatically. Our reliable suppliers will become our competitors.   

- The bottom line is that it takes energy to make energy...and solving our oil headaches by way of oil sands is only going to create new headaches.

- Demand for natural gas is slowly and steadily increasing not just in the United States, but elsewhere around the world, and energy-intensive operations like Canada's oil sands will only magnify that effect.   

- It takes energy to make energy...remember that phrase. It could potentially make you a lot of money over the next decade. We are on the crest of a great wave here, folks. The best is yet to come. Don't sell your oil stocks just yet.


Regards,

Justice Litle
for The Daily Reckoning