Time is running out for cheap oil.
And by “cheap” I mean $100 a barrel.
The reason is simple. The Saudis are lying about their spare capacity.
Spare capacity is the “safety switch” for global oil prices. It’s the amount of extra oil we can produce on top of what’s needed to satisfy normal demand.
Saudi Arabia sits on most of the alleged spare capacity of the Opec oil cartel countries. This is crucial for keeping oil prices from spiking too high. So it’s hugely important that the Saudis are telling the truth about how much extra oil they can produce.
As I said recently (Secret U.S. Embassy Cables Mean Oil Prices Could Double), a leaked U.S. embassy cable recently threw the Saudis’ spare capacity claims into serious doubt.
There is another view. This time from Goldman Sachs. According to a recently released Goldman report, Saudi Arabia raised supplies before unrest broke out in Libya.
This would leave the Saudis with no extra spare capacity.
If this is the case, unless there is a double-dip recession (which would reduce demand), oil prices have nowhere to go but up.
The Goldman report explains that Opec spare capacity could be 500,000 – 1 million barrels per day higher than is recognized.
Of course, spare capacity is just a way to moderate prices in case of a supply shock. Behind crude oil’s march past $100 a barrel are simple supply-and-demand dynamics.
The U.S. Energy Information Administration predicts global consumption of crude oil and similar liquids will reach 110 million barrels a day (bpd) by 2035. Right now, we consume about 88 million bpd.
Energy insiders have a hard time imagining how global oil output can grow beyond 95 million bpd…let alone 110 million bpd.
Why such a glum forecast? Because although there’s plenty of oil left in the ground, most of it is difficult to extract. It’s either deep offshore or in places like the Arctic. This oil may be plentiful. But it isn’t cheap.
In fact, it’s downright risky…
BP found this out the hard way last year when it ruptured a sea-floor oil well in the Gulf of Mexico, triggering the largest accidental marine oil spill in history.
This hasn’t been lost on the major oil companies. Oil is now so tough to find that big oil companies such as Royal Dutch Shell plc (NYSE:RDS.A) are diverting huge resources in finding large natural-gas projects instead.
This is having a profound effect on the industry. For example, according to Shell CEO Paul Voser, next year his company will produce more gas than oil for the first time ever.
If you haven’t already, go ahead and add some exposure to rising oil prices to your portfolio.
You can do this directly through the United States Oil Fund LP (NYSE:USO). This ETF tracks changes in the price of light, sweet crude oil, as measured by price of the futures contracts on New York Mercantile Exchange.
You can also do it indirectly through an ETF that tracks a basket of international oil stocks. I like the Energy Select Sector SPDR ETF (NYSE:XLE). This tracks some of the strongest companies in the oil patch. Top holdings include oil major Exxon Mobil Corporation (NYSE:XOM), oilfield services outfit Schlumberger Limited (NYSE:SLB) and oil and gas explorer Apache Corporation (NYSE:APA).
There’s plenty $150 oil left in the ground. But all the cheap stuff is either gone or disappearing fast.