Pending Oil Crisis

In reading the news stories and headlines over the past several months the world is being set up for an impending energy crisis that will make this past summer seem trivial.

With oil prices at their current levels the financial cost to producing energy is already starting to hamper current production. When oil begins trading in the $30-$40 range there are only few countries that can produce profitably at this price, Saudia Arabia being the main country that can. At these prices in makes sense for companies to simply stop production until prices rise again. The problem being that it is much easier to shut down production than it is to increase production.

Here in Alberta, companies are starting to lay off workers in the oil and gas sectors that do most of their business in the oil sands. Oil needs to be in the $70-$80 range to produce a profit. On the corporate side of the coin companies are doing the responsible thing by cutting back on projects and preserving capital while some are even acquiring smaller companies for the assets.

But on the commodity side all of these cutbacks will crimp the supply. The fact of the matter is there is no viable alternative to oil right now and we are still burning throught a supply that is non renewable. OPEC cuts to supply are starting to make their way into the system and my thought right now is that while the price is volotile and you need a strong stomach to ride the waves, the short to long term fundamentals are pointing towards a serious oil crisis.

Regardless of how the economy is doing or how well a company has access to credit, there is little to nothing a consumer or company can do if there is a shortage of energy supply. Governments have little to no control over energy prices as they are at the mercy of supply and demand.

In the short term interest of the economy we need higher oil prices if simply to keep the supply constant.

I'm continuing to increase my holdings in oil ETF's over this period of surpluss supply with the idea that these extrememly low oil prices will inevitably lead to drastically higher prices.