Remember “peak oil”?
This actually goes as far back as 1956, when a geologist named M. King Hubbert first formally presented this theory. The theory steadily gathered momentum as oil production leveled off – and oil prices skyrocketed.
Today, in the minds of many, Peak Oil is dead. This thinking is epitomized in a Forbes article from March 2017. The article begins as follows:
Oil is more plentiful than you can imagine. And we keep figuring out easier and more economical ways to get it out of the ground.
Such thinking is simplistic, to say the least. Describing oil as “more plentiful than you can imagine” is pure hyperbole and needs to immediately be dismissed. Stating that “we keep figuring out easier and more economical ways to get it out of the ground” is simply incorrect.
In recent decades, we have found new methods for extracting oil. These methods are neither “easier” nor “more economical”. Some historic numbers will illustrate this point.
One hundred years ago it was easy and economical to extract oil from the ground. In the more prolific fields, for every 1 barrel of oil used as an input of production, 100 barrels of oil could be extracted – a 100:1 energy surplus ratio. This represented the net quantity of oil that actually reached the global economy.
Flash forward to today. In unconventional oil operations today (the source of most new discoveries), for each barrel of oil consumed in production, only 2 – 6 barrels of oil are produced. The energy surplus ratio ranges from 6:1 to only 2:1, as reported in the corporate presentation of junior energy producer, Petroteq Energy Inc. (TSX: V.PQE, OTCQB: PQEFF, Forum).
Does this sound “easy”? No. Is it economically efficient? Absolutely not.
It’s harder to extract oil than ever before. It’s less-economical to produce oil than ever before. But there is an even more important dynamic here. The amount of oil that is actually reaching the global economy is much less than the “oil production” numbers produced by government and industry statistics.
Officially, global oil production has increased by roughly 10% over the 10 past years, but this is the gross number. What is the net number? How much oil production is actually reaching the global economy – once we subtract the billions of barrels of oil that are consumed each year just in the oil production process?
We don’t know. Big Oil doesn’t produce any numbers on this. Our governments don’t produce any numbers on this. Why not?
By pretending that global oil production is much more robust than it actually is, this has a depressing affect on oil prices. As sophisticated investors know, higher oil prices are like a “tax” on the economy, since oil is (still) an input in almost every facet of our economy.
Lower oil prices stimulate our economies. By deliberately depressing the price of oil with misleading production statistics, Western governments juice the economic performance of our extremely weak economies.
The reality is that once we subtract the billions of barrels used each year to produce the billions of barrels of oil we consume, that net oil production seems to be steadily falling – not rising. Net oil production has already peaked.
This still leaves one question in the minds of readers who still believe what they are being told about oil prices and oil production. If actual (net) oil production is much lower than what is being reported, why are oil inventories not much lower?
One part of the answer is that despite the weak conditions in the oil market and abundant oil inventories, the U.S. government has dumped millions of barrels of oil onto the market out of its Strategic Reserve. This totally defeats the purpose of even having “a strategic reserve”, which is to only release oil onto the market when prices are high and inventories are tight.
Another part of the answer to that question was already referenced. Western economies are so weak today (and have been so weak for the past decade) that Western oil demand has remained extremely muted. Indeed, in the United States – the world’s Great Economic Pretender – oil consumption is not much higher today than in the latter half of the 1970’s.
Examples of U.S. economic mythology are plentiful. The United States government has been pretending to have created 15 million new jobs since the start of “the U.S. recovery”. This ludicrous fiction is (inadvertently) exposed in one of the Federal Reserve’s own charts.
(the total percentage of employed Americans - click to enlarge)
The percentage of employed Americans has fallen by 3% (not risen) over the past 10 years – the U.S. Recovery. As a percentage, there are less Americans working today than there were 40 years ago. Claims that “the U.S. unemployment rate” has fallen are lies. There are more unemployed Americans today than at any other time in U.S. history, including over 50 million permanently unemployed Americans who aren’t even counted in the bogus U.S. unemployment statistic.
Translating these percentages, the reality is that there are more than 4 million less Americans with jobs today versus the start of the (supposed) Recovery. None of the “new jobs” advertised by the U.S. government and the Federal Reserve has ever existed. The so-called Recovery itself is nothing but pure mythology.
When the United States and other Western nations actually return to economic health (at some point), oil demand in these nations will turn solidly higher, since growing economies use more oil. What does all this mean for oil markets and Peak Oil?
The reality is that Peak Oil is real. Conceptually, it is even more relevant today than when this concept was introduced 60+ years ago. What has changed is that we need to define “peak oil” in a different manner.
As noted earlier, by all indications, global net oil production has already peaked. In other words, there will never again be as much oil available to the global economy as has previously been availableand the global economy continues to get larger over time.
For energy investors, the question is not “if” bull market conditions will return to the oil sector, only when. With oil prices artificially depressed and oil company valuations at bear market levels, this spells “opportunity” for value investors.
Peak Oil is a reality. Conversely, the “oil production” numbers that we are being fed are extremely misleading. The economic statistics we are being fed are outright lies. This means that the actual fundamentals in the oil sector are much, much stronger than what is being outlined by most energy analysts.
When all this fiction is exposed and when oil prices correct (upwards) to reflect the actual fundamentals for this sector, those investors who get in ahead of this correction will capture the full disconnect in these valuations.
FULL DISCLOSURE: Petroteq Energy Inc. is a paid client of Stockhouse Publishing.