Thursday, March 1, 2012

The Weekly Update 3-2-2012

Energy prices and the outlook for same are in the news again!

In the last few weeks I have read a powerful article on the huge amount of oil ( a by-product of natural gas "fracking") coming online from the "fracking" process and another article, from an equally credible source, suggesting we all should expect higher oil prices soon.

Supply and demand economics mandates that you will not have both, i.e. more supply and a higher price!  So what gives and who do you listen to?

Personally, I believe that our country has an incredible supply of oil reserves both proven and  undiscovered.  In the early 1980's one of my clients was Raymond Plank, former CEO and founder of Apache Corporation.  Mr. plank told me that our energy policy was pretty clear; it was to import and use other countries energy supply before our own.  That said, we may be close to the point where the energy it takes to get new energy out of the ground exceeds the value of the energy found, i.e. "peak energy".

I do not have any references to prove this  "peak energy" point is upon us, with or without the oil we have access to from the new fracking technology.  I do have resources that suggest it is "heavy", or "dirty oil", and costs more to refine into usable products.  In addition, it could be at least a few years before any of the oil flows at meaningful enough levels to reduce the price of oil, if ever.

The credible source mentioned above, suggesting we prepare for higher oil and gasoline prices is John Hofmeister, former Shell Oil CEO.  His quote at the North American Prospect Expo in Houston was: "There's not enough oil out there to meet demand".....and to expect "gas lines and paying $7-8.00 a gallon". 

I now know a few things:

*New supply will be just as expensive as current costs and is not right around the corner. 

* The U.S. produces 7 million barrels of oil per day and consumes 18 million barrels per day.

* China consumes 9 million barrels per day and is projected to consume 15 million barrels per day in just 3 years.

*India now consumes 4 million barrels per day and is expected to consume 7 million barrels per day in 3 years.

* The number of  motor vehicles in China grew from 20 million in 2005 to 60 million in 2010.  That number is expected to grow 3X again to 180 million by 2015, just 3 years.

*We are allocating as much as 10% of the assets entrusted to our over site at The Wealth Strategies Group to this sector.  Yes, the world governments could enter the energy complex to reduce prices, as they have in the past, but that would likely be a temporary delay of the inevitable price increase.

* Expect higher gasoline prices ahead.....and the effect it has on other areas of consumer spending, i.e. slower economic growth and the need for fewer new jobs.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

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