The Boy Scout Motto Is "Be Prepared"

Jim Brown
Printer Friendly Version

How do we prepare for peak oil? How do we prevent the storm headed our way from destroying our way of life and that of our children? There are some concrete steps we can take to be ready.

This is the fourth chapter in a series I started last week and I had planned on this being the final installment. However, from the emails I received it appears I need to continue this for a few more days. You can read the other installments here:

1. What Will Really Happen in 2012?

2. Saudi Arabia Oil Production Has Peaked

3. The Reality of Peak Oil in 2012

To review, I believe peak oil will arrive in late 2012 if Saudi Arabia is really hiding the truth about their available production or as late as 2014 if they actually have as much production as claimed. When peak oil arrives will not be known for many months afterwards because of the millions of barrels in storage around the world. It could be a year or more after the actual peak before the stark realization of the problem dawns on the world's consumers.

There is no doubt oil production will peak over the next 2-3 years. The geological and political facts are indisputable. Oil does not have to peak this soon but that would require countries like Venezuela, Saudi Arabia, Russia, Iran and about a dozen others suddenly opening their borders and asking the international oil companies like Exxon, Shell, BP, etc to come explore and giving them enough incentive to spend billions on exploration programs. They would also have to provide guarantees their leases would not be nationalized after the hard work was completed.

Obviously we all know this is not going to happen. These countries know that their oil in the ground will be worth more later and they are not in a rush to give it away at a discount to a company like Exxon. They can afford to patiently produce their own oil at their own pace and watch the prices move steadily higher.

Peak oil will arrive because all the easy to produce oil has already been found. The number of new oil field discoveries peaked in 1970. We currently find only about half as much oil as we consume every year and this trend has been moving steadily downward for the last three decades.

Remember, peak oil is really about peak flows. It is not how much oil is in the ground but how fast it can be produced. Finding a 500 million barrel field does not mean we have 500 million barrels in production. The recoverable portion of a 500 million barrel field is typically about 50%. A field of that size normally produces for 20-30 years with the peak in the first 3-5 years and then a 25-year decline. To produce 250 million barrels over a 30 year period would average 22,831 barrels per day. Obviously it will produce a lot faster in the first 2-3 years and a lot slower once it peaks 3-5 years into the cycle.

The monster fields on land, close to the surface where the oil was available using shallow wells have all been significantly depleted and are only a fraction of their original output. Recent significant discoveries have all been in deep water, require 5-7 years to achieve full production and deplete very quickly. Operators produce the oil as quickly as possible because maintaining the billion dollar production platforms is very expensive. Get the oil out and shut the wells down as quickly as possible.

Production from these deepwater platforms is very complicated. Those off the coast of Brazil will require stationary oil tankers positioned around each group of wells. The oil is pumped from the wells into the tankers as temporary storage then a new tanker shows up to offload the oil and take it to shore. Doing this in 10,000 feet of water 250 miles from shore in all weather conditions is a very difficult process that does not lend itself to rapid production. Petrobras does not expect to increase production to one million barrels per day until 2020 or as late as 2025. The fields were initially discovered up to five years ago. That means full production from date of discovery is 15 years or more. Over that 15 years the depletion rate of global oil supplies, using a very conservative rate of 4 million barrels per day per year will account for a loss of 60 million barrels per day by 2020. The Tupi field is a big discovery that added 1 mbpd to global production but it is only a drop in the bucket compared to the depletion rate.

Peak oil is coming. There is nothing we can do to stop it. What can we do to protect our families from the impact?

Peak oil will create the mother of all recessions. For the last 100 years the global economy has thrived on cheap oil that powered the industrial revolution and the agricultural revolution. Cheap oil drove America to the top of the global economy. In 2008 just before the crash the U.S. consumed nearly 22 million barrels of oil per day or 25% of the daily global supply.

Unfortunately when the peak comes the countries worst impacted will be the poorest countries and the biggest users. The U.S. consumer can afford to pay more for gasoline than the poor emerging market consumers so we will feel the impact the least at the very beginning of the peak period. We will be paying more for gasoline but we make more per capita so everything is relative.

Once the realization hits the world that peak oil has really arrived the situation will begin to change rapidly. Supplies of oil will decline rapidly because many countries that currently export oil will immediately understand that once their oil is gone they won't be able to afford to buy oil on the market. They will immediately restrict exports in order to save their precious natural resource for their own people. Once one country takes this step, others will follow.

Most people, including exporting countries, believe the OPEC lie that there is plenty of oil. It is the easy answer. Politicians can listen to OPEC and the IEA telling us there is no problem and are lulled into a false sense of security that oil is plentiful and will always be available. The advent of peak oil is going to be a major global shock to the system.

The peak oil recession will be permanent. It is basically a peak in cheap energy. From that point on the cost to transport anything from point A to point B is going to rise sharply. That is food, people, and goods and services.

For the normal person this means your commute is going to become very expensive. Large cars and SUVs will be dirt cheap as the price of gasoline rockets higher. I am talking about $5 in late 2012, $6 in 2013, $7 in 2014, etc. How would your driving habits change at $7 per gallon? A 20 gallon fill up at $140.

Step one in preparing for peak oil is to be conscious that car values are going to change rapidly over the next couple years. Small economical cars will become more expensive and gas-guzzling SUVs will be nearly worthless. I hate it but I don't get to make the rules. I currently drive a midsized SUV and I hate those microsized cars that you need to get decent mileage. Unfortunately if I don't want to be paying 50 cents a mile ($7 gal, 15 mpg) I am going to have to downsize. My SUV is paid for so I will probably hold off on that move as long as possible with a watchful eye on the peak oil story and the price of oil. Fortunately I don't commute anywhere so my monthly fuel bill is relatively small. If you commute you definitely need to be planning a change. If you owe on your current gas-guzzler don't wait until the value falls below your balance due because it will never come back.

If you own a high dollar car today with a high dollar payment to match then you are wasting time and money. I know people with car payments over $1,000 per month. A paid off $10,000 car will accomplish the same task and allow you to invest that $1000 per month into oil stocks. That $12,000 invested in 2011 could be worth $100K five years from now. Every dollar counts!

In the energy recession everyone that still has a job and commutes will be rushing to find a home or apartment closer to work. That could be closer to the inner city or closer to a bus/train station. If you wait until the peak arrives and the world is suddenly aware of the problem then you will have two problems. The home you want to move to will suddenly cost a lot more money. The home you want to sell in the suburbs will suddenly be worth a lot less money because 50% of the homes in the subdivision will also be for sale. This will cause a seller panic and prices will be dropping like a rock.

I know this is a painful topic. It goes against everything we have grown up with over the last 50 years. I love my current house. It has everything I ever wanted and is convenient to everything. I hate the thought of moving. Since I don't commute you are probably thinking "why do you have to move?"

I have to move because once the energy recession begins and people in other homes around me begin to panic sell, the value of my home will plummet. I have $400K of equity in my home today even at the depressed prices from the recession. How stupid would I be to stick my head in the sand and watch that equity evaporate to zero with a for sale sign on every other house on the block?

My wife keeps telling me it does not matter. If we live here until we die it does not matter what the house is worth. Personally I would rather bank that money and use it to improve my life and invest for the future rather than watch it evaporate. A house is just a house. Everyone needs to understand that. It can be an asset or it can be a liability. Millions of people found out about that liability problem in 2008-2009. That $400K will be worth a couple million five years from now if I cash out and invest in oil stocks.

Remember, the energy recession is going to be permanent or until everyone in the country has an electric car. Once oil production begins to decline it is going to continue to decline for the rest of our lives. That means every year gasoline prices are going to be higher. By 2015 the availability of gasoline will also be a problem. How will that affect your driving to work, school, store, etc.

The recession will be caused by the cost of fuel and the impact on consumers. Consumers will spend less for everything. They will quit going out to eat. They will quit going to the mall. They will quit taking vacations away from home. Anything that requires gasoline or money that could be spent on gasoline will be cut back significantly.

This means businesses will be cutting back significantly. Retail stores will be closing by the thousands. Strip malls will be vacant. Office buildings will be vacant. Businesses will be failing at an alarming rate. Unemployment will be the highest since the depression.

The government is going to be in serious trouble because tax receipts will be down sharply at the same time as the boomers are retiring by the millions. The swelling unemployment will become a huge drain on government resources. State and local governments will be in serious trouble. The compression of citizens into the inner city will cause problems. The vacant homes in the suburbs will be a problem for crime.

Because of falling real estate values, flight from the suburbs and lower tax income most state and local governments and utility companies will be looking for ways to raise revenue. You can expect utility bills to rocket higher even though they have nothing to do with oil. Costs other than gas/electric generation by utility companies will be moving steadily higher. Expect utility bills to double since fewer people will be living in the suburbs. City services will go up like water, trash, taxes, etc.

This is just some of the reasons why everyone should be planning now for a change in lifestyle by 2014.

I strongly urge everyone reading this today to begin planning for the future. I personally believe everyone, regardless of current lifestyle or location, should spend an hour with a pad and pencil and deciding what they would do different with gasoline at $7 and under the scenario I outlined above.

I believe everyone has the opportunity for the trade of a lifetime. If you are reading this today with oil at $85 and knowing it will be $200 in a 2-3 years then you have the makings of a great bunch of trades.

I call it a once in a lifetime opportunity. If you knew the Great Depression was coming three years before it happened what would you have done? If you knew the Great Recession of 2008 was coming two years before it happened what would you have done? You know the Energy Recession is coming. What are you going to do?

Obviously oil related stocks are going much, much higher. Profits are going to be obscene as crude prices move well into the triple digits. Notice I said OIL related stocks not ENERGY stocks. Even though the gas explorers are trying to get more oily today it will take them years to make the switch and they will still have massive gas components. I don't see natural gas moving much higher for years to come because of the glut from shale.

However, oil stocks and that includes the integrated oils, independents, drillers and service companies will do very well. I advise against long term investments in refiners. As oil prices move higher there is a strong resistance to gasoline prices moving higher. Crack spreads shrink and can actually go negative. We saw a prime example of this in 2008 with refiners losing money with prices well over $100.

Knowing this in advance I suggest everyone restructure your finances as quickly as possible and devote every available dollar to investments in oil stocks. I am very serious. $2,000 invested today could easily be worth $20,000 or more five years from now. A 1000% return on your investment is very possible because of the explosion in profits from the surge in crude prices. Many of the large oil companies have crude production that costs them today $20 to $30 on average. When prices go to $150-$200 their profits are going to quadruple or more.

The drilling activity is going to be frantic once the peak arrives and export countries begin limiting exports. Producing new oil will become top priority for the U.S. since we consume the most. U.S. citizens are going to be screaming at the administration in power and demanding something be done about high gasoline prices. The only thing they can do is put on the full court press for oil exploration inside North America. This means more rigs, more drilling and more fracking. There will be less concern about the environment and more concern about getting thrown out of office for allowing the crisis to happen.

A word of warning. Just because we know where oil prices and stock prices will be 3-5 years from now that does not mean the charts are going straight up to get there. This is a long-term investment process. Oil prices are still cyclical and seasonal. We need to buy the dips and sell the peaks and reinvest the money. Some investments will be perfectly suited to buy and forget. Others will be cyclical but the long-term trend will be higher.

We need to avoid companies with assets in unfriendly countries. Once the peak arrives and export countries start cutting back on exports the odds are good those unfriendly countries will begin a wave of nationalism that confiscates those assets. They will not want an American company producing African or Middle East oil at a discount and selling it to the USA.

Those companies will be ok to invest in until the peak arrives. Once we see the changes in the geopolitical climate we can exit those plays and reinvest into something else.

Companies with limited exposure outside the U.S. would be good. Companies with large reserves and a strong track record of replenishing those reserves will be the best.

I am not going to get into specific companies in this article. Since the stock picks section of the OilSlick newsletter recommends plays every week there are plenty of trade ideas there. Our average holding period is 3-6 months and we trade stocks, options and futures.

Let me recap:

1. Plan on what your vehicle inventory will look like in 2012-2013 when the Peak arrives.

2. Consider downsizing and centralizing your home to avoid driving long distances.

3. Cash out and invest the equity in your current home while it still exists.

4. Restructure your lifestyle, assets and bills to allow the most additional cash to invest into oil stocks.

5. Consider your current job. Will it still exist in a permanent energy recession?

6. Spread the word. Warn your relatives, friends and anyone that will listen to you. Feel free to forward this email to them.

Questions and Answers

I received several good emails over the weekend from the earlier articles in this series. I have already written too much today but I would like to spend the next couple of days just answering questions.

Please use the link at the top of the page to email your questions and I will devote a couple days to Q&A this week.

There are no dumb questions. If you are thinking of a question there are probably 100 others like you that are also thinking the same thing but are afraid to ask.

I will not use your name. You don't even have to give your name to ask a question so don't let that stop you.

We are about to go through a life changing once in a lifetime event. Don't you want to know everything you need to know to survive it and prosper?

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production to peak and begin to decline in the 2012-2014 timeframe. This is called "Peak Oil." This is the point where global production of conventional oil supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Oil countdown clock is ticking and time is growing short. Peak Oil is coming, are you prepared?