If you are keeping up with the price of oil by the barrel you likely have seen the price come down considerably from the around $120 per barrel to now around $87 per barrel WTI price. I also expect you have noticed that gas at the pump has come down, but not as much as priced at the barrel head. There are lots of reasons for this, but here I will concentrate on three of most prominent.
However before I go to those reasons let's again put a few myths to bed. The most prevalent myth is the peak oil theory. Peak oil does not exist, has never existed, and it is made up game from environmentalists to alarm people about running out of oil so we better invest in other energy sources. Of course oil interests played along with this game since they were being hit with bad PR about opposing it, besides peak oil theory helps hold up the price of oil you are selling so why not go along. Another myth is that we are running out of oil and frankly that is not true either. There are trillions, not billions, of barrels of oil in the earth and only price decides if it is worth drilling and getting out of the pools. The US itself has more oil locked up in rocks in the Rocky Mountain region than Saudi Arabia has in all it has underneath the sands there. Currently it is too expensive to mine. Similar oil resources are all over the earth. Another myth is that oil is not renewable, because no one really knows what makes oil. Yes I know you have been taught it is decaying fossils, but that itself is a unproven theory pushed by those who again have interests in saying oil is a dirty fuel. Oil very well might be nothing more than some of the molten core of the earth seeping up to the surface. Same argument can be made for natural gas. Last myth is Big Oil controls the price of oil and wants to keep it high. Yes Big Oil, and I use that term loosely here, does want to keep oil prices high. But large oil companies no longer have much say in the price of oil. Note that even the largest oil companies control no more than 3% or 4% of the world's current supply. Most oil is controlled by national oil companies like Saudi Arabia and Venezuela. Chavez has more say on the price of oil than any of the largest five stock owned oil companies in the world combined. Note that if the price of oil gets too high then other energy sources become more viable and with all market driven situations if that occurred either by choice or by lack of oil the free market would quickly find and deliver and alternative. Now to the three factors mentioned earlier.
Cost ...The cost of oil coming out of the ground varies greatly. Saudi Arabia can pump it up for pennies on the barrel. So they have a seriously high profit margin. They need it to keep their people happy to preserve the royal family there. Cost at most drill heads now is around $40 to $50 per barrel, and you need to get around $80 per barrel to get most drillers going, at $60 per barrel or less most drillers stop work. Note that many oil pools never stop producing, the price decides if the pool is worth getting out of the ground. Therefore we are very close now to what would be about the right price for the most oil to be produced at current costs. So unless some other factor changes the price you see at the pump now is what it will be long term. One other note there are some oil drillers out there now who are developing ways to get the final barrels out of old abandoned pools and that in itself is what is helping the US increase oil onshore and holding down costs.
OPEC..As mentioned earlier Saudi Arabia can pump for pennies, but due to the high cost of keeping the people in the kingdom happy means there is little room for downside on price for them. Ditto this for many of the OPEC countries. So even with high profit, there is high cost in another way. Therefore they have strong incentive to keep prices high. But not too high, since higher prices means supply will increase from the first factor above and they lose control of the cartel price structure. So there is a delicate balancing act here to keep prices high enough to allow for nice profits, but not to cause increasing supply and not to tip the world into recession where demand drops as well. OPEC, recently has been watching the oil sands of Canada begin to ramp up production and there is worry that that huge oil resource could hurt OPEC's pricing structure. To try to put some pressure on that scenario, they have been buying up some of that resource to control supply. Note that China has been doing likewise.
Political.. This factor has as much control as any here. Political control means control of where countries drill, quality of the drilling, and when it can be done. Countries like Russia have large oil resources, but due to the problems with courts and legal issues there most knowledgeable oil companies avoid drilling there so the quality of the drilling is average at best. Hence the actual amount of oil coming out of the ground now is less than it was several years ago. Canada, on the other hand has decided to fully develop it's oil sands resources, add in the legal stability of Canada and you get first quality and first rate supply growth. The United States has hampered it's resources. Frankly making it next to impossible to recover the large oil pools in the arctic as well as the oil in the Gulf of Mexico as well. Recently North Dakota has seen an oil boom since there is a Democratic Senator there who has cut the political impairments and the large pool there has been allowed to be recovered. The US has large pools as noted but likely will never get developed due to political interests. Also note the large difference between West Texas Intermediate price of $87 per barrel and the Brent European price of $115 per barrel. If you think the world uses the Brent price give yourself a gold star. The reasons for the difference is very well known. There is a glut of oil coming from Canada at the Cushing Oklahoma terminal where there is not enough pipeline capacity to get the oil to the Texas refineries, so the glut means the oil sitting in tanks in Cushing is priced less since it has to be trucked out to refineries. That extra step means that oil is priced less since there is considerable extra cost to truck in to refineries instead of using a pipeline. Here again political concerns about not allowing pipelines to be built and refineries to be built cause prices to be abnormally high here in the US.
To sum up the price of oil and the price of gas at the pump is likely near a bottom now. There could be another 10% or so, but with the above noted factors the only way oil price can go is up. The one outlying factor here is demand and if the worldwide economy picks up and supply and demand become unbalanced on the demand end prices could move up strongly. However that would offer opportunities for additional resources to be found and drilled to again offer balance in supply so upside could eventually come into balance at an even higher price. Only a out and out double dip worldwide recession would cause oil to oversupply and dip significantly in price, but only for a small time frame as drillers would stop drilling the most expensive wells and supply would dry up quickly.
I again mention some investments to take advantage of these pricing factors such as ERF a Canadian driller that continues to impress. Many of the larger oil companies such as Exxon, symbol XOM are also good considerations here. BP offers higher risk investment opportunities. Add COSWF, which has a presence in Canadian oil sands and CVE which has Canadian interests as well. Investing in oil resources will continue for many decades longer to be a viable way to make money.
I own either as a option or long ERF.
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