Buying Oil Investments – Chapter 11: Peak Oil

This is chapter number 11 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 10: Investments in Gold versus Oil

The idea of peak oil is that it is a theoretical date at which time the world’s production of oil will have peaked. Any production of oil after this date will be in a state of continuous decline facing an ever decreasing oil reserve. In short, the world’s output of oil can never be increased after this stage. We are all aware that fossil fuels resources are finite and that we might be decades away from peak oil.

Nevertheless, the idea of peak oil has served to spur on developments in other areas of the energy sector hoping that when the date for peak oil arrives we will already have a viable alternative source of fuel in place of oil.

The Implications of Peak Oil:

For the last 100 hundred years or so, the demand for oil has steadily been rising. When the date of peak oil arrives, basic economic theory stipulates that the price of oil will rise due to the decline of supply. We are already aware how much impact that will have in our lives as oil is such a critical commodity driving the engine of our economic growth. The immediate result will be that this will result in a more aggressive search for more supplies. Old fields previously considered not economically viable will be exploited for every drop possible. Such is the case in Canadanow where oil sands are being tapped for oil using Steam Assisted Gravity Drainage technology (SAGD).

Alternatives to Explore:

Even if peak oil is going to arrive in the near future, this does not necessarily spell doom for us. Human resourcefulness has always made us more resilient in the face of adversity. In fact, when such a scenario does arrive, the street-smart investor will recognize there are also numerous other opportunities which will present themselves for the investor to reap. Such investment opportunities worth looking into include:

Oil Producers:

As the world’s oil reserves begin to decline after peak oil, this will naturally prompt for the search of more oil reserves to replace existing diminishing stocks. Once the oil producers begin to increase their exploration budgets, the industry auxiliary services will stand to be a direct beneficiary of this increase in investment in this area.

Oil Industry Giants:

More direct investments into the established players in the Oil & Gas industry will be a good move regardless of peak oil or not. As prices of oil increases, so will the profitability of these oil giants. This will result in higher share prices in these companies.

Other Sources of Oil:

As prices of oil continue to rise over the long term, this will make what was once uneconomical to exploit to become a profitable venture. Exploitation of unconventional sources will definitely be the first of the list for alternative sources of oil. A good example is the extraction of bitumen from oil sands in Canada and Venezuela.

Other viable alternative sources of oil can be from oil shale if the price of oil has exceeded the $70 per barrel mark. The oil shale containing kerogyn have the potential to be made into synthetic petroleum. Another possible source can be the conversion of coal to synthetic oil. Nevertheless, all these alternatives are to be regarded as temporary measures as we are still dealing with fossil fuels in the end which is non renewable.

Investments that should be Avoided during Peak Oil:

All the above investments as alternative investment when peak oil arrives entails that the primary input component into that industry is oil. For those investments whose primary cost is oil, they should be avoided. For instance, the shipping, haulage and airlines sector should be avoided as they will be frontline companies who will be hurt most when the price of oil increases as fuel cost is a major component of their operating cost. 

Read Buying Oil Investments – Chapter 12: Conclusion