Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Crude drains from under the Middle East’s sandy deserts,
• What happens to “exportland” when domestic demand ramps up?
• Profiting on the road to Peak Oil, a resource breakthrough and more…

Joel Bowman, from a flooded Dubai, UAE…

Apologies for you late Rude Awakening this morning. Your managing editor got
stuck in this:

More important than the torrential downpours flooding the desert above
ground, however, is the draining of the liquid gold stored under the sandy
dunes.

Read on as Dan Amoss explores the post Peak Oil world and gives the nod to a
few companies that should probably be on your radar in the meantime…

—- Special Situations Resource Report —-

“The Biggest Resource Breakthrough Since the ‘Beaumont Miracle’ of 1901”

64 publicly traded companies are already deeply invested… insiders are
already raking in as much as $205,421 per day on the shares…

But only one of these cutting-edge companies offers you the “secret wealth
advantage” I reveal below…Read on Here

———————————————

A Sexy Import
By Dan Amoss

Even as crude oil hovers around $100 per barrel, very few of us worry where
our next barrel is coming from…or what that barrel will cost. But the $100
price tag is telling us loud and clear that the days of plentiful oil are
over…and the days of scarce oil are upon us. The “next” barrel of oil will be
much more expensive than the last one.

Notwithstanding America’s nonchalance about her imported oil supplies, this
precious energy source does not effortlessly and automatically emerge from
the ground in some foreign land, transform itself into gasoline and appear at
the service station on the corner. In fact, there is nothing effortless or
automatic about the process, least of all America’s continuing access to
imported oil.

The global oil trade has changed radically during the last few years.
America’s access to imported oil is contracting, even while global demand is
booming. To better understand these two trends lets take a look at a
hypothetical oil-exporting country, according to Jeffrey Brown’s Export Land
Model.

Brown’s straightforward theory illustrates how dramatically exports can
decline from a given country when two things occur at the same time: Domestic
consumption increases while production declines. Brown, an independent
petroleum geologist who writes for The Oil Drum, presented his Export Land
Model at the ASPO (Association for the Study of Peak Oil and Gas) conference
in October. When you really think about this model, the debate over how much
oil is in the ground becomes trivial. Rather, we should be thinking about how
much oil could be available for export in the coming decade.

Brown’s model is easy to understand. Several historical examples validate it.
As Brown explains, his model represents:

“A hypothetical country with ultimate recoverable reserves of about 38
billion barrels… The model showed the effect on net exports of a country that
hit peak production and started declining at 5% per year. The exporting
country consumes 50% of its production, and that consumption is increasing by
2.5% per year. The 5% decline rate is loosely based on the post-peak Texas
decline rate of about 4% per year.”

The red line in this chart shows that “Exportland” begins by exporting 1
million barrels per day. Because production, the black line, is declining at
5% per year and consumption, the gray line, is increasing at 2.5% per year,
exports plunge to zero in less than a decade.

The following chart shows how Brown’s model compares with two recent case
histories: Indonesia and the United Kingdom. Indonesia, depicted in black,
reached peak production in the late 1990s and has almost become a net oil
importer. The U.K., depicted in gray, peaked around the turn of the century
and became a net oil importer in just a few short years. U.K. North Sea
production declined rapidly because offshore fields tend to have very high
decline rates.

The top five net oil exporters from 2000-2005 were Saudi Arabia, Russia,
Norway, Iran, and the United Arab Emirates. Oil consumption in these five
countries grew 3.7% per year over this period. Since 2005, however,
consumption growth has accelerated in a few of these countries, so net
exports from the top five may decline at a much faster rate than the market
expects. If so, we may have seen only the early stages of dramatic oil price
increases.

Brown’s theory is no small consideration to the world’s largest importer of
oil. The U.S. inhales a whopping 13 million barrels a day – a figure which
represents about one quarter of the world’s exported oil. America’s reliance
on imported oil grows by the day, as our domestic production steadily
declines. At present, imported oil satisfies about 60% of U.S. consumption.

So how will the U.S. cope in an environment of tightening world oil exports?
Easy answers are not easy to come by. Very few Americans realize that the
U.S. no longer has a monopoly on the world’s oil exports. So instead of
trying to gain access to new supplies and/or altering our consumption habits,
we’ve been trying to tax “greedy” oil companies. The longer our denial
persists, the more painful the adjustment will be.

Mexican oil production is declining so fast that it will likely become a net
oil importer within a few years. Meanwhile, Venezuela’s Hugo Chavez just
announced that his country will export 500,000 barrels per day of crude to
China in 2008, up from the current level of 350,000 barrels per day. He wants
to increase shipments to 1 million barrels per day by 2012. Whether he
achieves this goal or not, one thing is clear: Venezuela will soon be
shipping lots more oil to China than it will to the U.S.

For years, China has aggressively pursued contracts to secure reliable oil
supplies, especially in regions like Africa. As it currently stands, the U.S.
has no energy security plan other than to remain friendly with Saudi Arabia
and hope that country meets its production goals. But even if OPEC can keep
production high enough to meet America’s insatiable demand, it’s unlikely
that it will ship oil in the same quantities to the same customers.

Under a worst-case scenario, within a few years, much of the world’s tradable
crude oil could be withdrawn from futures markets and locked up under long-
term supply agreements with “favored” customers. And current trends point to
the U.S. losing its favored customer status, even among longtime reliable
suppliers from the Middle East.

What does this mean for the U.S. and other oil importers? It means the global
drilling rig fleet will grow in importance. The rig fleet must become more
productive, because target oil and gas reservoirs are becoming smaller and
more scattered. The recent spike in drilling activity has strained the
industry, wearing equipment out faster, and dramatically hiking costs.

What does this mean for investors? The stock market will reward oil service
and equipment companies that improve oilfield productivity. National Oilwell
Varco (NOV), NATCO Group (NTG), and Grant Prideco (GRP) are my favorite
candidates in this sector. And my colleague over at Outstanding Investments,
Byron King has recently recommended a couple of interesting subsea oil
servicing companies. (Check out the Rude Awakening edition of December 18,
2007)

The post-Peak Oil world is upon us. Don’t be a victim.

[Joel's Note: Readers wishing to take a look at Byron’s extensive Outstanding
Investments portfolio, covering oil and gas, power, alternative energy,
precious metals and a few plays on infrastructure and logistics may be
interested in the report below. Byron, our resident Peak Oil expert, has a
stack of companies already up triple digits since he recommended them. But,
as the global oil crunch grows more intense, there are a handful of companies
in there that will likely do even better than that. Here’s a free report with
a bit of background and Byron’s details: Why Oil Will Hit $150 This Year.

——————————

Rude Endnote: Perhaps you disagree with us on the price of oil? Maybe you see
2008 ushering in a return to $50, $40 or even $20 oil? Well, we’d like to
hear your thoughts. Whether you predict a major pullback in crude prices or
think they are going to the moon, you can have your say be shooting us an
email at the address below. Then, simply look out in future Rudes to see your
words in print.

Cheers,

Joel Bowman
Rude Awakening