A number of factors have changed the face of peak oil. Low U.S. growth, increased oil production and more fuel efficient modes of transportation have dampened the effects of rising energy costs. Peak oil is still a real phenomenon, but in the medium term it looks like it will affect the economy through subtle means.
US Consumer Price Index: All Items Less Energy data by YCharts
Don’t Ignore Inflation
Peak oil conjures up images of mile-long lines at gas stations and whole nations experiencingCuban-likeeconomic collapse. Recent data suggests that in America, peak oil may be mainly manifest through strong inflation that decreases the average worker’s real income.
Oil’s main use is in transportation fuels like gasoline, jet fuel and diesel. The recent oil production boom in the U.S. is based upon tight oil that requires oil prices around $90 per barrel or higher. While the EIA projects that the average import price for crude oil will fall until 2018, it only projects a fall from $109 to $93. That is to say, the price will fall to the point where the most expensive oil fields are just breaking even.
Hidden Peak Oil will Attack the Middle Class
Hidden peak oil will not be a horribly public affair where the price of oil doubles in a week; it will be a slow eating away at America’s middle class through increased inflation and transportation costs. Companies that rely upon a growing American middle class should be invested in carefully.
Where to Invest in the Midst of Hidden Peak Oil?
USO Total Return Price data by YCharts
Simply buying an oil ETF like United States Oil Fund LP (NYSEMKT:USO) is a bad idea. This fund tracks America’s West Texas Intermediate (WTI) futures, and WTI is expected to fall because of continued supply growth. Also, the roll-over cost of the underlying futures cause the ETF to provide a return significantly lower than the crude oil spot price. Also, United States Oil Fund LP’s expense ratio of 0.45% drags down earnings over the long term.
At the same time, there are a number of companies with operations that can be profitable without $120 oil. Exxon Mobil Corporation (NYSE:XOM) posted average 2012 per-barrel production costs of $13.02 for total per-barrel oil equivalent, $23.81 for bitumen and $47.45 for synthetic oil. These low production costs and the integration of Exxon Mobil Corporation (NYSE:XOM)’s upstream and downstream operations allows it to provide a strong return on investment (ROI) of 32.9%.
Over the coming decade, the company’s costs will increase as unconventional sources like the Kearl oil sands facility provide a greater percentage of production. Regardless, Exxon Mobil Corporation (NYSE:XOM) is a great investment for a sideways oil market. It has almost no debt with a total debt to equity ratio of 0.08 and the proven ability to develop low-cost fields.
Chevron Corporation (NYSE:CVX) is another well-capitalized and capable firm. In 2012, its upstream production costs were around $30 per barrel. Chevron has moved from having the fourth lowest costs in 2009 to having the second lowest costs in 2011; in a group of similar oil producers. Chevron Corporation (NYSE:CVX)’s ROI of 21.4% is below Exxon Mobil Corporation (NYSE:XOM)’s, but Chevron is still an attractive investment. It recently bought into the Kitimat LNG project in BC, Canada. This plays into Chevron Corporation (NYSE:CVX)’s existing LNG plays throughout the world and helps get hydrocarbons out of Canada’s congested oil and gas-exporting provinces.
Like Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) has almost no debt with a total debt to equity ratio of 0.10. It can use its size to maintain production levels in a sideways oil market.
Suncor Energy Inc. (USA) (NYSE:SU) isn’t a $200 billion oil major, but it is one of the lowest cost oil sands producers. From 2011 to Q1, 2013 it has managed to lower cash operating costs in Canadian dollars from $39.05 to $34.80. The company is planning to grow its production by 350 thousand barrels per day (kb/d) by 2020. This will be a major boost from its current bitumen production around 450 kb/d.
Suncor Energy Inc. (USA) (NYSE:SU)’s debt load isn’t excessive with a total debt to equity ratio of 0.28. Recently the company has taken a number of hits including a $1.5 billion write down. Over the next decade its fortunes are looking up as a number of new pipelines should make it easier for Suncor to get its products to market.
Conclusion
Peak oil is still here, but it is seen in strong inflation and elevated transportation costs. In this environment pure crude oil ETFs should be avoided because it is very unlikely that oil prices will spike over a short time frame. ExxonMobil and Chevron Corporation (NYSE:CVX) are two strong investments in this environment. They use their extensive capital base and low cost production to drive high returns. Suncor is another company to look at with its low-cost oil sands production.
The article Has the EIA Killed Peak Oil? originally appeared on Fool.com and is written by Joshua Bondy.
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