The Era of Cheap Energy is Over

In the long run only two things really matter regarding the price of oil: supply and demand. And the inexorable march upward for the price of oil reflects two clear facts: global demand is increasing and supply is constrained.

On the supply side we’re simply not finding oil fast enough to replace what we’re using and production at many of the world’s biggest oil fields is declining. We’ve likely found all of the “easy” to find oil. Recent significant finds have been offshore and deep—deep underwater and underground. The Jack Oil Field discovered in the Gulf of Mexico in 2006 sits 28,175 feet below the surface, the first 7,000 of which are comprised of water. Notwithstanding that find, and a 2007 find off the coast of Brazil, the world continues to use energy much faster than it is discovered.

1966 was the best year ever for global oil discovery – a total of 48 billion barrels were discovered. Since then, the amount of oil discovered each year has trended down, while the amount of oil consumed has gone up. In 1988 a total of 24.8 billion barrels of oil were discovered while 23.5 million barrels were produced. Every year since then has seen more oil consumed than discovered. To put it simply, the world has used 488 billion barrels of oil in the last 19 years (1988 through 2006) but has only discovered 302 billion barrels.

The imbalance between discovery and consumption doesn’t mean we’re about to exhaust the world’s supply, the real issue is how much oil we can pump up to the surface each day to meet growing daily demand.

And just as global production is being constrained, global demand is accelerating. The rise of Asia, specifically China and India, has led to a surge in global energy demand. As these two countries continue to expand, their energy consumption challenges the entire energy system, straining oil trade and raising prices.

And then there are the already industrialized nations, such as the European Union and the United States, which will continue to demand energy as they maintain and grow their own economies. For instance, oil consumption in the U.S. alone has ‘jumped’ from 17 million barrels a day in the 1990s to 21 million barrels a day in 2007.

All of which brings us back to that indelible law of supply and demand.

Related Funds:    Alternative Energy Fund  |  Global Energy Fund