Rising Oil, Higher Prices at the Pump Coming Soon
Dec 8th, 07
Investments in oil and gas explorations are beginning to take off amidst predictions of $100 per barrel crude oil prices.
As Bill Waltzer fills up his SUV with premium gas he can't help but smile at the high gas prices. No, Bill is not insane. Actually, he considers himself a frugal consumer. Bill however, like many other accredited investors, is a direct owner in oil and gas wells. For Bill, high prices at the pump translate into more profitable returns on his oil and gas investments.
With crude oil trading at record highs, Bill has every right to be smiling. "My revenue from my oil wells is up considerably these days." he stated. "This is the best it's been in years. I've waited patiently for oil to trade at $100 or more a barrel and now it's getting close."
According to some industry experts, Bill's wait for $100 per barrel may soon be over. Frank Holmes, who manages the US Global Investors' Global Resources Fund, recently was quoted on MSN as saying, "We think $100 a barrel oil is very possible".
Former head of Shell UK, Ronald Oxburgh stated last week that global oil supplies are continuing to decline as demand is continuing to soar. He went on to say that, because of economic laws of supply and demand, oil prices could hit $150 relatively soon.
Another expert, chief economist Jeff Rubin of CIBC World Markets has predicted prices of "around $100 a barrel by the end of next year."
With production of oil in 33 of the 48 largest producing countries in decline and consumption in developing countries escalating at alarming rates, it's more feasible than not that oil and gas prices will continue to skyrocket over the long-term.
According to the Energy Information Agency, the world will need to produce 118 million barrels of oil per day to satisfy demand in 2030. Current world production, around 85 million barrels per day, falls far short of the anticipated demand.
Without new major oil discoveries in the coming years, the extra 33 million barrels of oil needed to supply demand in 2030 will be impossible to produce. In a July 19, 2007 article The Economist stated, "The world is consuming more oil than it is producing." This production shortage in crude oil is expected to worsen as more and more oil producing countries' reserves begin to decline.
It's unclear exactly how much increased energy prices will ultimately impact consumers spending habits. One thing is certain, at $100 per barrel for crude, gas prices would ultimately raise, most likely to around $4.00 per gallon. That increased expense alone would cut into consumers' discretionary incomes and could end up hurting the bottom line for large retailers, like Wal-Mart.
For many investors the solution to higher prices at the pump is simple; invest in oil and gas exploration. In other words, you're going to get hit at the pump anyways, so what's wrong with being on the other side of the equation?
First of all, the simple answer to that question is risk. Not all new oil drilling projects actually find oil and others can't produce enough oil to make the project economically feasible. That's why the most successful investors in oil and gas exploration, including the large oil companies themselves, are leveraged out over several projects at any given time.
It doesn't hurt so much when an investor has ownership in five exploration wells and one or two of them come up dry. The other successful wells could easily offset any loss of initial investment funds in the unsuccessful wells.
Larry Milnes, CEO of Nevada based Eno Petroleum Corp, stated, "Smart investors in oil and gas have small working interest ownership positions in multiple projects. They spread their risk out, so if a well comes up dry it doesn't make that much of a difference to their overall return."
To many experts, $100 or more per barrel seems like an inevitable reality, especially considering that current increases in global demand are projected to increase at 2% annually. Add to that current global supply constraints and it's easy to see why some accredited investors are increasing the proportion of oil and gas investments in their portfolios.
When asked if he would continue investing in new oil and gas explorations Bill Waltzer stated, "Absolutely. Investing in oil and gas just makes sense right now. The overall global trends should keep energy prices on an upward curve."