Oil - History and Opportunity

It’s a High-Energy World

As energy goes, so go the world’s economies. And the vast majority of that energy comes from petroleum—oil and gas.

And yet the phenomenon is fairly recent. In fact, it was just over 100 years ago that Spindletop—the world’s first gusher, near Beaumont TX—blew open the era of plenty: supplies of oil and gas abounded to fuel industrial and economic growth beyond imagination. But now the abundance is ended. Demand is growing and supplies are straining to keep the world growing.

Now we live in the tension between two conflicting facts: 1) we need more energy, and 2) oil and gas production is past its peak and on its decline.

Market Forces and Investment

Given that news, the time is ripe for oil-and-gas investors. Among the market forces driving the current opportunities is petroleum’s “low-tech” perception. Investors laser-locked on high tech—particularly on computers, telecommunications, and the internet—are leaving wide open the doors to powerful opportunities.

Technology

Few industries rely on technology more than the oil-and-gas industry. While investors dismiss it as “low tech,” the oil-and-gas industry is making creative use of high-resolution sonograms and MRIs to identify potentially productive formations in wells drilled.

A horizontal well, for example, first drills a vertical hole one to two miles deep, then steers a steel pipe through an angle and curve and drills horizontally, parallel to the surface. As micro-miniaturized electronics and computer processing help identify the formations being drilled, the information helps steer the drill bit within a 10- to 20-foot zone for up to a mile.

The Prices Timeline

For years, huge Middle Eastern reserves kept world gas prices low, but in the 1980s, a flood of oil by Saudi and other suppliers caused a long-term industry slump. More than 500,000 experienced workers left their jobs; in the U.S. drilling rigs were scrapped. Then came the demise of the Soviet Union, a more orderly OPEC market, and several years of relative stability. But that ended in 1998 when a boost in OPEC production coincided with the Asian economic meltdown. Result: the lowest oil-and-gas prices, in constant dollars, in more than 50 years—and abysmally low prices drew minimal investment and production levels fell into serious decline.
Environmental Forces

Environmental forces shaped a new generation of electricity fueled by natural gas—and the internet and technological revolutions spurred demand for electricity. Note: a server farm can use as much electricity as an electric steel plant.

The Opportunity Factors

(1) OPEC production is near peak capacity and the historic supply margin is all but gone

(2) Domestic oil-and-gas production is in significant decline

(3) New technology more rapidly drains oil-and-gas reserves

(4) Demand for oil-and-gas is significantly up

(5) Particularly in the U.S.

(6) The U.S. has a shortage of drilling rigs and experienced people to run them

(7) China’s dramatic growth drives its 20-plus percent annual growth in oil imports

(8) When demand exceeds supply, prices rise to a level that eliminates some market demand. The oil-and-gas industry is facing a profitable pricing scenario with long-term implications for intelligent exploration, development, and operations.