Tuesday, December 20, 2005

Central Asia, Washington and Beijing Energy Geo-politics

The number of oil discoveries around the world is rapidly increasing now that over 3,000 rigs are active. The number of active rigs has increased several folds since the bottom made when oil traded at $12 per barrel in 1999.

The major new developing field is in Kazakhstan, a former state of the Soviet Union. This region holds an estimated 35 billion barrels of oil, significantly more than the North Sea. The field produces 1.3 million barrels per day now but is expected to reach 3.6 million barrels per day by 2015.

We have not heard a lot about this oil in the US because China is buying much of the production. We should all appreciate that oil is a fungible product; the more that is discovered in one part of the world the more that is left in other parts of the world for others to use.

Discoveries have recently been made in the Gulf of Mexico, in the Congo and in Canada. The search is constant. T. Boone says 85 barrels production per day is probably peak oil. I think he is wrong or he is trying to talk the market up. Time will tell.

Right or wrong, coal can be converted to fuel for somewhere between $35 and $45 per barrel. New technology might lower the price. Large scale conversion plants will not be built until it is clear that the price is likely to stay above $45. In the meantime, coal, nuclear, and other facilities will be built to replace oil in the production of electricity and in industrial processes.

Investors should only overweight energy stocks if they believe the price is going up much higher. The market will discount the probability that the price in a few years will be at $45 or less.