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"World will face oil crunch in five years."
That's not exactly the kind of headline you want to read when crude oil is already at $73 a barrel. When things are this bad -- crude prices are up 12% in the past two months as of July 12 -- you don't want to hear that they're going to get worse.
Yet that's exactly what consumers -- and investors -- should expect, the International Energy Agency said in its latest Medium-Term Oil Market Report, issued July 9. The market for oil will get even tighter over the next five years. (And in case you're looking for a way out, natural-gas markets may be even tighter.)
As much as I'd like to believe that the agency has made a mistake, the logic behind its pessimistic assessment of supply and demand is impeccable.
In the best case, the International Energy Agency calculates, supply will grow at 1% annually. Even that might be optimistic, though, because global oil production grew by just 0.4% in 2006. That creates just a teeny-weeny problem, because the agency projects that demand will grow by 2.2% a year over the next five years.
Squeezed from both ends
Let me explain what is leading to the squeeze that will be so painful over the next five years, and then I'll give you my pick for the oil stock that's best positioned for this scenario.This big squeeze is coming from both the demand and supply ends of the oil market.
Higher oil prices so far have not led to lower consumption. That's what's supposed to happen, right? As oil and gasoline get more expensive, people should use less, economic theory says. But not this time.
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Why? Lots of reasons:
- Not everyone is convinced that high prices are here to stay, so changing behavior radically doesn't seem worth it.
- A lot of consumption is built into the infrastructure of how we live: If you've got to drive to work, you've got to drive to work.
- Reducing consumption can require a long lead time. The next car purchased will be more fuel efficient, for example, but that could be years away.
- Some consumption is subsidized, so higher prices haven't yet fully hit the market in places such as Iran, Venezuela, Indonesia and China.
- And the United States, which accounts for 25% of global oil consumption, still doesn't have a national program to reduce demand for oil. The sad fact is that we now use 15% more oil than in 2000.
Developing economies create the biggest addition to global demand. Many consumers in China and India and elsewhere are just now getting paid enough to join the global market for cars, electrical appliances and air travel. Oil consumption in China, for example, is growing at better than 7% a year.
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Jubak’s Journal: Will oil prices go higher?Both peak oil theory and current industry trends point to the same conclusion, says MSN Money’s Jim Jubak. As a result, you can expect oil to be more expensive over the next five to 10 years.
But that's an old story. The crisis that the International Energy Agency is trumpeting now comes from the supply side. Thanks to years of underinvestment, mismanagement, lack of technology or political interference -- or all of the above -- oil production is dropping faster than anyone expected at some of the world's biggest oil exporters.
In 2006, oil production fell by 6.9% in Norway, 10% in the United Kingdom (which shares North Sea oil fields with Norway), 2.1% in Mexico and an estimated 5% in Venezuela. In all of those cases, the rate of decline is accelerating. The problem is geology, not politics (as it is in places such as the Niger Delta, where a collapse of order has shut down 25% of Nigeria's oil production). Any fix for a geologic problem is expensive and can take years to implement.
Continued: Keep up the pressure
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