| Is the energy boom over or was 2008 part of a natural cycle that sets the stage for the next bull market? I tend to believe that 2008 is similar to previous lows we have seen in 1998 and 2002 when oil prices were at cycle lows. Investment Yields in the Sector are at Record Highs The chart below gives you a long term view of the distribution history of an index that covers the Canadian Royalty Trusts and Oil Sands oil producers. Despite the record drop in energy prices and corresponding decrease in income distributions, the yields are at record highs. 
Global Oil Demand Remains High The table below shows that the economic contraction has only curbed demand for crude oil by 300,000 barrels/day in 2008 during one of the worst global recessions in decades. | Year | Global Crude Oil Supply
(MM b/d) | Global Crude Oil Demand
(MM b/d) | Excess Supply
(MM b/d) | | 2005 | 84.7 | 84.0 | 0.7 | | 2006 | 85.5 | 85.1 | -0.4 | | 2007 | 85.6 | 86.1 | -0.5 | | 2008 Projected* | 86.5 | 85.8 | 0.7 | | 2009 Projected* | n/a | 86.3 | n/a | * Source, IEA World Energy Outlook 2008, Released Dec 11, 2008 New Crude Oil Discoveries are Dwindling Global oil discoveries have declined each decade since the 1960s (see chart below). 
Major Exporters are near their production limits The International Energy Agency and the US Energy Information Administration believe that the major producers such as Saudi Arabia and Russia will be able to increase production dramatically by 2030. I think the historical evidence does not support this viewpoint. Saudi Arabia reached its peak crude oil production in 1980 and is experiencing declining production from their main fields. Russia peaked during the cold war and has chased foreign investment away via quasi-nationalization of crude oil and natural gas reserves. 
Canada will become a Top Crude Oil Exporter by 2030 Canada is one of the few oil producers expected to increase production significantly over the next two decades. Meanwhile, many of the OPEC producers are experiencing major increasing internal demand because of rapid population growth and rising per capita consumption. In addition, many countries heavily subsidize gasoline which encourages overconsumption locally. The charts below show the expected breakdown of crude oil exporters for 2015 and 2030 based on IEA data and SWM estimates. 
Canada Has the Largest Proven Reserves of Oil in the World OPEC oil producers are assumed to have the world's largest oil reserves however their reserves haven't been independently verifies for decades. In the mid 1980s the national oil companies of the OPEC nations increased their proven reserves on paper by 100% to 200% without any reasonable justification. After extensive study of the available reserves data, adjustments were made for the paper reserves created in the 1980s and for cumulative production from the OPEC producers since the 1980s. The results show that Canada should be recognized as having the largest crude oil reserves in the world and that OPEC reserves could be significantly overstated. 
My advice to investors is to take advantage of today's absurdly low prices and invest in the good quality Canadian oil sands producers and royalty trusts that will benefit from the major trends developing in the global energy sector. Long term, you can expect inflation protection and leverage to oil prices while collecting a substantial yield in a currency that should benefit from rising energy prices. |