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Crude Awakening
New York: December 06, 2010
By John Stephenson

The largest and most important industry on the planet is about to experience a crisis that will test our underlying assumptions about business, the economy and the world in which we live. For more than 100 years, we\\\\\\\'ve based our way of life on the premise that we would have unfettered access to cheap, reliable energy. That view helped spawn global trade and all the while our cities grew larger, our homes got bigger and so did our cars. But the era of cheap energy is over—for good.

Since 1854, when the kerosene lamp was invented, we\\\\\\\'ve increased our dependence on oil and have sucked some 650 billion barrels of it from the ground. Access to abundant cheap oil makes suburbia and much of our modern world possible. Oil fuels our cars, planes, trains and buses and is a critical feedstock for the plastics and cosmetics industries. Enough oil to fill a trillion barrels remains in the ground, but the cheap easy-to-get stuff is already gone. And while energy exists in other forms, 80 to 90 percent of our global energy comes from non-renewable fossil fuels.

Our economic progress has been aided by a massive productivity boost from consuming cheap fossil fuels. Society benefits enormously when it recovers vastly more energy than it expends acquiring it. During the industrial revolution, the switch from wood and wind energy to coal was a sea change that helped underpin economic prosperity and progress. During the 1930s, when the planet was awash in abundant, easy-to-access oil, almost 100 units of energy could be recovered for every unit invested. Today that ratio has plunged and is sitting closer to 15 to 1—implying that the era of cheap oil is over.

Even that may be a best case scenario. The world clings to an aging critical lifeline of less than 100 oilfields that have been declining for years. The last major oilfield to come into production was the giant Cantarell field in Mexico , which was discovered in 1975. With peak production of more than three million barrels a day, this was truly a Goliath of a field. To keep the good times rolling and boost production levels, Pemex , Mexico\\\\\\\'s national oil company, initiated an enhanced oil recovery program in 1998. Despite spending more than $10 billion on the effort, Cantarell\\\\\\\'s production started dropping quickly in 2008.

According to recent research conducted by Morgan Stanley, the basins that offer the greatest promise for the oil industry are offshore. The areas identified in the report as having the potential for significant new oil finds include: Guyana-Suriname Basin , pre-salt West Africa, Greenland, East Africa stretching from Mozambique to Madagascar , the Falkland Islands and eastern Indonesia . All the easy to find on-shore oil has already been discovered and exploited decades ago. For an oil hungry world, these prospective basins may not be the silver bullet we are looking for since the historical record of offshore production has been disappointing.

In the global financial crisis of 2008/2009, a lack of transparency helped accelerate the meltdown and instill panic throughout the world financial community. Today, the energy industry faces a day of reckoning when global demand begins to outstrip our ability to supply energy at any price. Yet in spite of the various warnings and the fact that all of our largest fields have entered into irrevocable decline, we foolishly and naively cling to this notion that somehow more supply will be found to magically balance demand. Worse still, we are flying blind without a backup plan. More than 90 percent of the world\\\\\\\'s proven oil and gas reserves are nothing more than accounting fiction—more misleading and inaccurate than the financial statements of the now defunct Lehman Brothers. Even though our economic well-being depends on the health of just a very few oil & gas fields, no independent third-party verification has ever been conducted.

Making matters worse, the rise of Asia has introduced a new well-capitalized competitor to the great game of oil & gas exploration and development. While we bicker over windfall profits tax and dirty oil, Asian energy companies, armed with a de facto state backing, are locking up control of energy resources globally. And while alternative forms of energy offer tremendous promise for an energy addicted world, they aren\\\\\\\'t a viable substitute for energy from fossil fuels.

Ignorance certainly wasn\\\\\\\'t bliss during the global financial meltdown and it won\\\\\\\'t be of much use during the coming energy crisis. The stage is set for a cataclysmic energy crisis, one that will quickly morph into panic and social chaos. If you don\\\\\\\'t have a heavy weighting toward oil producing companies in your investment portfolio, why not? Since energy is about to become the number one issue in America and around the world, and now is the time to prepare your portfolio for the world of tomorrow—a world where a crude awakening will occur and the era of cheap energy will be over.

In this new world of sluggish supply and voracious demand, oil the single most important commodity that there is, will see sharply higher commodity prices in the future. And supply will continue to come from smaller, more technically challenging reservoirs than at any time in the past—a circumstance that will benefit the offshore service companies that specialize in these difficult reservoir engineering issues. For my money, I think investors should focus on exploration and production companies that have a decent pipeline of growth projects on the horizon or oilfield service companies that will be the beneficiary of sharply higher future oil prices.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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