Global Supply and Demand

Global Oil Supply

Estimates of the world's supply of oil and gas vary from source to source. Most predictions estimate enough oil and gas reserves to meet demands for the next 20 to 30 years. While few scientists believe world production has already peaked, there are many who say we're very close to it.

Since 1981, the world has consumed more oil than it has discovered. Today, the world uses roughly four barrels of oil for every one barrel that is discovered. To complicate matters more, the nature of exploration has changed. Earlier eras developed much of the easier-to-find oil fields.

To borrow from a farmer's vernacular, the low-lying fruit is gone. This means that a more comprehensive and more complex process must take place both to find and maximize the returns from drilling. As these larger fields age, and decrease in production, newer sources must be brought online. These new fields are smaller in size and production, and often exhibit higher decline rates. Consequently, it becomes an increasingly difficult task for the oil industry to maintain, let alone increase, the global supply of oil over time.

Additionally, unstable political relations between the US and countries such as Iraq, Saudi Arabia, Iran, Venezuela, and Russia make it even more crucial that the US reduce its dependency on foreign oil.

World Oil Shortfall

Global Oil Demand

World demand for oil is expected to increase by 54 per cent in the first 25 years of the 21st century, according to the Energy Information Agency of the U.S. government. To meet that demand, the world's oil-producing countries will have to pump an additional 44 million barrels of oil each and every day by 2025.

Much of the growth in demand - about 40 per cent - will come from Asia. Its daily oil requirement is expected to double by 2025, thanks mainly to rapidly growing economies in China and India. India's oil needs are expected to grow by four to seven per cent a year. In 2004, it consumed two million barrels a day.

In 2004, China passed Japan as the world's second-largest consumer of oil. It consumed an average of 6.63 million barrels of oil every day - about twice what it produces. Its oil imports doubled between 1999 and 2004. China's demand for oil is expected to continue to increase by five to seven per cent a year. If that happens, China will surpass the United States as the world's largest consumer of oil by 2025.

This consumption explosion can't go on forever without serious repercussions. The International Energy Agency, which gathers production information from producers around the world, expects the world to hit peak production between 2013 and 2037. After that, the agency predicts, production will fall by three per cent a year.

The London-based Oil Depletion Analysis Centre recently released a study that predicted tight supplies through the rest of this decade, even if all of the new major oil recovery projects scheduled to come on stream over the next six years meet their targets. The only way to avoid it, the study said, is for demand to drop sharply.

Our Conclusion

We do not expect demand to drop sharply as a consequence of the global financial crisis. Market prices of oil and gas will experience a short-term to long-term increase as world economic growth reestablishes itself, and world oil demand nears or even outstrips production. For that reason, the opportunity to profit from substantial medium term oil price increases is considerable.

The question is not whether any investment portfolio should include oil and gas. The question really is, "What is the most profitable way to invest in this essential industry?"