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By Lou Gagliardi on Feb 19, 2013 with 6 responses

Global Peak Oil Production — Where to Invest and Profit

Let’s build upon last week’s long-term bullish case for crude oil. Much has been said about, “Global Peak Oil” production in the last few years, and probably for good reason. We know that U.S. crude oil production peaked in the early 1970s just as Mr. King Hubbert predicted back in the late 1950s.

But, is peak global oil production just around the corner?

Energy industry analysts believe that global oil production will peak sometime between 2015 and 2025. That sounds like a fairly broad range. However, the reality is that it’s a fairly short timeframe in geologic time that does not even register a notch, and it’s rapidly coming upon us.

(Read More: Five Misconceptions About Peak Oil)

I’m not a forecaster, but I have studied oil supply and demand for the last 20 years, and I do believe that global crude oil production has reached a plateau, and may very well peak sooner than we think.

global wellhead production

Why? For one thing, on average, the global natural decline rate of producing wells is roughly 7% plus or minus 1% or 2%. That means production has to grow at least 8% a year to register a net positive increase.

From 2000 to 2011, global oil production at the wellhead has increased at an annual compound rate of 1%. From 1989 to 2000, that annual growth rate was 1.4%, the same rate as 1970 to 2011. The slowing rate of production growth is evident in the chart below that plots the year-over-year percentage change in production.

global wellhead production year change

As the growth in global oil production has slowed, the gap between global oil consumption and production has widened that puts upward pressure on crude prices.

oil-consumption-production-gap

For the “big oil” multinationals like ExxonMobil, Chevron, BP, Conoco, Shell, Total, Statoil, and ENI, the picture looks even worse, whether it’s on a quarterly year-over-year comparison, or on a quarterly sequential comparison.

(Read More: How Much Oil is Left in the World?)

Globally, all the western multinationals (IOC) and national oil companies (NOC) are struggling to keep pace with the demand for crude oil. Currently, the dilemma is not as acute as it could be because global demand for energy is weak, but if global demand accelerates in the near term, the strain on production to meet crude oil demand will tighten and that will push crude prices significantly higher.

majors global oil production decline

The trend is clear, global crude oil production is struggling to meet demand in the long-run. That supports elevated crude prices over the long-term, and in turn the advantage is to seek out “oily” producers that are “growing” oil production.

A few things to remember: invest in low cost producers with deep resources to feed future growth production, strong balance sheets to invest through the cycles, and positive net cash flow to fund future growth prospects and return cash to shareholders. Protecting the downside is just as important as maximizing the upside, and above all else, investing is a long-term “process.”

Lou Gagliardi

  1. By Jeffry Estillo on February 19, 2013 at 6:05 pm

    Are oil prices truly out-running the rapid devaluation of the US dollar? Not so much, especially when you measure the price of oil against the price of gold.

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    • By ttman on February 28, 2013 at 8:21 am

      The US dollar has appreciated against the Euro in the last 5 years. (can’t find data for longer than that).

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  2. By thesafesurfer on February 20, 2013 at 1:08 am

    We’ve been running out of natural resources since the 1790′s according to Malthusians.

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    • By ttman on February 28, 2013 at 8:16 am

      We will never run out of anything according to FoxNews and their flock.

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      • By thesafesurfer on February 28, 2013 at 2:01 pm

        Was Fox News around in 1790? Are you taking your meds?

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  3. By Oldmusher on July 21, 2013 at 1:42 am

    Oil is a finite resource, and we have been sucking it up at a prodigious rate for the better part of a century. We are now reduced to scrambling for the dregs through the process of fracking. The cost of production is drawing ever closer to the time when it will be uneconomical to use the so-called “tight” oil and natural gas through extraordinary production efforts. In effect we are having to run faster just to stay where we are. That is a strategy doomed to fail.

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