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Energy

Michael Schaefer, Editor
Secret Stock Files
March 25th, 2006

When oil was moving from $20 to $60 everyone said it would kill the economy and ruin the stock market. During this time I was saying no, that's not right. It will take much higher prices. It will take oil prices in excess of $150 to really impact the economy.

After all, $60 oil is now the norm. It's no big deal. Everyone has adjusted. But please understand this is just a staging area, a short break in energy's inexorable march higher.

The only reason we're seeing this break now is because we've just experienced one of the mildest winters on record. Canada has recorded its warmest winter in nearly 60 years of record-keeping.

Environment Canada said that temperatures averaged 7 degrees warmer than normal for the entire period of December 1st through the start of March 2006. In fact this winter has been warmer than even the previous record year by a full 2 degrees Fahrenheit.

All I'm trying to say is this recent consolidation of energy prices after the big run up is a normal and necessary retracement, just like we've seen in stocks and indexes. Everything surges forward and then backs off. It is the natural rhythm of the markets. Energy prices are going to go higher and with them our energy investments will go higher.

This past weekend I was in Las Vegas for a variety of meetings. One that really stuck with me was with a couple of very smart oil guys.

These Texas oil men are as informed as anyone on the planet as to what's going on around the globe in the energy business. In fact they have a staff of 20 people who do nothing but monitor this activity.

Their view of peak oil was a bit different than mine, yet our price expectations and timing matched perfectly. These guys don't see peak oil until 2030, but say it's going to take every bit of technology and unconventional production available, including a much higher price per barrel to delay the peak.

As you know I believe we are seeing peak oil right now at roughly 85 million barrels a day of production. On top of that I'm expecting $150 oil in the next 12 to 24 months.

Our Texas oil friends are looking for peak oil in 2030 yet at the same time they are looking for $150 oil in the next 12 to 24 months.

Let me bring up another point. Peak oil is the point at which global oil production will never go higher. Even though my friends from Texas believe global oil production will not peak until 2030 they are not saying that global oil production will keep up with demand.

As I said before, global oil production is roughly 85 million barrels a day but it is conservatively estimated that within 10 years daily demand will be 125 million barrels. So it is conceivable we could see marginal daily production increases and still find ourselves with a considerable supply deficit.

I have to be quite honest with you; I hope this entire energy crisis unfolds in slow motion so the world can adjust slowly and over time. The worst possible scenario would be to wake up one morning and find the world had changed while you were sleeping and there is nothing you can do about it.

Oil & Technology

Unfortunately the truth about oil fields and technology does not give me much confidence. The one-time second largest producing oil field on the planet, the Cantarell field in the Gulf of Mexico owned by PEMEX, the Mexican Government's oil company, is the perfect example of ŚThe Truth About Oil Fields and Technology'.

The vast majority of technology in the oil business that has been applied to existing oil fields is used to make these fields produce their oil faster.

It's always about producing more oil faster to make more money now. That is the oil company mantra and has been for more than 100 years.

A perfect example of this is the Cantarell oil field. Originally it was consistently producing 1 million barrels of oil per day and probably could have maintained that level of production for many decades.

But as the mantra goes, Śmore oil faster' technology was applied to this giant field and production more than doubled to 2.3 million barrels per day. They did achieve their goal, unfortunately at the sacrifice of longevity.

This great oil field, once the second largest producer in the entire world is now officially moving toward catastrophic irreversible decline.

According to a study published by PEMEX it is expected that by the end of next year Cantarell oil production will drop from 2 million barrels per day to 875,000 barrels per day and then down to 500,000 barrels per day the following year.

That's a decline of 1.5 million barrels of oil per day over the next two years from global supply.

Here is the rest of the story ­ even with all the marvelous new oil exploration technologies oil companies like to tout, the Cantarell oil field in the Gulf of Mexico is the last million barrel per day producer that's been discovered, and that was 30 years ago!

Keep this in mind ­ PEMEX had every expectation Cantarell would keep producing much longer. It didn't. All of the big oil fields in the Middle-East are much older and have been producing much longer than the Cantarell field.

All of the Middle-East oil fields are much closer to the end of their life than anyone wants to admit. Over the next 5 to 10 years we are going to see many of these fields fall like dominoes into irreversible decline.

And all the experts will act surprised and shocked and tell the world how these giant fields were expected to produce oil much longer. You'll wake up one morning and your world will have changed.

Michael Schaefer, Editor
Secret Stock Files
website: www.secretstockfiles.com

Michael Schaefer is a legendary stock speculator and Editor of the Secret Stock Files. Investors don’t call him the “Other Oracle of Omaha” just because he grew up 2 doors down from Warren Buffett. He’s called that because he’s made millions for his readers investing in undiscovered precious metals and junior resource stocks.

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