The question is: If and when the energy of a barrel of oil is required to produce a barrel of oil, how can the author say this is "No Doom, Just an Honest Assessment"? For this means that the net energy yield from petroleum becomes ZERO!

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The Crude Truth Some die-hard Pollyannas will argue about new technologies or giant discoveries just waiting to gush to the surface. But if you talk to oil insiders, a typically optimistic bunch, you see unanimous conviction in their eyes that oil reserves are rapidly dwindling. Meanwhile, our dependency on crude grows each day.

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by John Myers

CALGARY, Canada - According to a just-published Bush administration energy report, "America in the year 2001 faces the most serious energy shortage since the oil embargoes of the 1970s. A fundamental imbalance between supply and demand defines our nation's energy crisis ... If U.S. oil production is allowed to continue rising at the same slow rate it did during the last decade, projected energy needs will far outstrip expected levels of production."

This isn't news to us. For the past two years we've known energy was hot. Just now the big players are catching on. They understand that oil output in the United States is falling fast. And there isn't a damn thing anyone can do about it. So the institutions are lining up, plowing billions into energy investments.

Some die-hard Pollyannas will argue about new technologies or giant discoveries just waiting to gush to the surface. But if you talk to oil insiders, a typically optimistic bunch, you see unanimous conviction in their eyes that oil reserves are rapidly dwindling. Meanwhile, our dependency on crude grows each day.

Oil Addiction

In June OPEC refused to boost production, maintaining its ceiling of 24.2 million barrels a day (mb/d). Saudi Arabia, the cartel's swing producer, tried to calm anxious traders by announcing it would make up for Iraqi pumps that have been shut off. No doubt about it, OPEC can again dictate prices. The cartel's output accounts for almost half of the world's total crude production. Suddenly it's a seller's market.

And who's to blame? Let me ask you this: can every crackhead in America blame Colombia for manufacturing cocaine? Of course not, and neither can America's insatiable appetite for oil be blamed on impoverished Gulf nations whose only export is oil. Like every addiction, this one is getting worse.

A decade ago world oil consumption was 66 mb/d. Last year it topped 75 mb/d. Demand could top 90 mb/d by the end of the decade. At the moment world oil consumption is growing at an annual rate of 2.5%. But the rule of seventy-two dictates that at this rate, world oil demand will reach 150 mb/d inside 30 years.

And it's not just the United States that is thirsty for crude. China imports 800,000 barrels of oil daily. At its current rate of growth, by the year 2015 China will be importing 8 mb/d, equal to what the United States uses today. By 2025, China could import 16 million b/d. You don't need an Ivy League MBA to understand that this kind of demand in the face of declining reserves will make oil a very expensive commodity.

Craig Hatfield, a professor of geology at the University of Toledo, puts the oil situation into perspective. "The world has burned more oil since the year 1970 than throughout its entire history (up until) that point. Huge volumes of oil have been found since the 1970s, but we're using that oil so much more rapidly that the top of the curve (maximum output) is no longer hard to see."

No Doom, Just an Honest Assessment

Of course, we are not running out of oil. But as I've said in the past, the problem is we're running out of cheap oil. At the dawn of the petroleum age there were 1.6 trillion barrels locked inside the earth's crust. A hundred years later we've used up almost half of that, some 784 billion barrels. That puts us on the downward side of the production slope. As any economist will tell you, this is the stage where higher prices start to set in.

Some 60% of what has been discovered lies in about 300 giant fields, most of them in the Middle East. The peak discovery rate was in the 1960s, and that has fallen dramatically in recent years. Meanwhile, the elephants (a field with more than a billion barrels of reserves) outside the Persian Gulf have been largely drained.

And while new fields continue to be found, their average size has fallen drastically. This partly explains why the cost of capturing oil is rising.

For example, in the 1950s oil producers discovered about 50 barrels of oil for every barrel invested in drilling and pumping. Today, the figure has fallen to five for one. Late this decade that ratio will hit one for one.

Now I've read the analysts that think oil prices are going to fall while prices of coal and natural gas will rise. This is impossible. Oil is used directly or indirectly in everything. Try bringing coal to market or moving natural gas without petroleum. Oil provides about 50% of the fuel used in coal extraction. And natural gas is often a byproduct of oil wells.

Oil Shortages - A Long Time in the Making

Over 40 years ago, geologist M. King Hubbert made a frightening prediction for the future. He said that oil output in the lower 48 states would peak around 1970. People said he was nuts. Yet lo and behold, he was almost dead on. Today, new scary scenarios are being written by established think tanks. And this time at least some people are taking them seriously.

In 1995 Petroconsultants published a report for oil industry insiders. It sold for $32,000 a copy and was titled, "World Oil Supply 1930-2050." The report concluded that world oil production could peak as early as this year and then decline to half that level by 2025. The report also said that large and permanent increases in oil prices were inevitable.

Dr. Marion Stewart, an oil economist, believes that the drawdown in U.S. reserves will push oil prices much higher. "The next oil shock will make the previous one seem trivial by comparison."

Little wonder oil prices remain strong, defying the economists that said $25 oil was a flash in the pan. At this writing Brent Sea crude is $28 a barrel, and it is hard to picture it below $20 again.

Surprisingly Easy Profits From Wall Street's Forgotten Market

John Myers - son of the great goldbug C.V. Myers - has been helping readers earn suprisingly lucrative returns in stocks largely unkown to Wall Street's wunderkind since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of oil and gas industry profits. To begin making money using John's profitable insights please subscribe to Outstanding Investments.

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-- Robert Riggs (rxr.999@worldnet.att.net), July 24, 2001