Tuesday, February 21, 2006

Oil Discovery in Australia


It took 8 days for Avery Resources to drill a wildcat well in the Cooper Basin in Australia. The well tested at 1,814 barrels per day. The company will drill at least 8 more wells in the area.

Drop by drop, oil is being found. With active rigs at levels not seen a decade, oil is going to continue to be found. Demand is going to continue to grow because China, India and other developing countries are growing. The strong demand demonstrates strong economic growth around the world.

The great news is that this growth is happening in the midst of a productivity boom. Therefore the growth is occurring during a period of relatively modest inflation.

Those who are overly concerned about inflation are often in the camp that oil is going to $100 per barrel soon. I don't see it because demand is seriously curtailed as the price rises and because the rate of substitution is gathering speed.

The law of substitution is at work all around the world. Brazil is running its cars off ethanol and Canada is digging more tar sands than ever before. Ford and GM will produce more than 600,000 ethanol ready cars this year. I am not an ethanol enthusiast at current oil prices except to the extent that more and more waste products can be converted to ethanol. For example, I don't believe in growing corn to produce ethanol but I do believe in taking the left over corn stalks from a dairy farm and converting them.

Coal to gas will be a major contributor to our energy needs as will new nuclear plants. It will take time for major investments to yield results. In the meantime, drop by drop, oil is being discovered around the globe. The discovery of new supplies will help hold the line until substitutes come on line.

Investors should be cautious about jumping on the latest fad. Solar panels and wind mills are romantic but not realistic. They will help in certain situations but are not yet efficient at large enough scale to make a real difference.

My wife and I are making plans to "down size". Our new home will downtown. We will be within a short walk to the bank, the Y, the movie theater, the restaurant, etc. Our drives to church to visit our children and to many other places will be cut in half or more. The law of substitution is alive and well. Investors have generally already bid up the price of energy related issues. To make serious money, your odds are better elsewhere.