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Canadian Oil Sands, Disasters & War

Are the Canadian Oil Sands the best investment opportunity of our lifetime?  When you consider the possibility of wars in the Middle East and government intervention across the globe (as well as disasters like the BP oil spill), they just might be!  We’ve been discussing asset management in a crazy economy.  In the last 3 posts of this series, we’ve looked at the advantages and disadvantages of oil and other energy investing.  Today, we’ll look at these factors mentioned above.

Government, Disasters, & Wars

Like any other investment, there are characteristics particular to oil investing.  In the oil industry…

1)      Governments are constantly changing regulation and most of the world’s oil seems to be held in some of the least desirable government controlled locations.

2)      An oil spill, explosion, or other disaster can be very damaging to the environment, people, and by extension shareholder value.  Any company to whom this happens to can be hit very hard.  For example, a company whose main activity is drilling in the Gulf of Mexico can see business obliterated if the US Government bans offshore drilling.

3)      Wars (particularly in the Middle East) can push oil prices significantly higher, but can also be damaging to companies if they operate in large part in that area.

The Canadian Oil Sands

It’s interesting that the places in the world which seem to have the most oil, also seem to have the most instability.  The Middle East is constantly in and out of war.  Many other countries which have oil also seem to have unrest.  Nigeria has it’s rebel groups.  Venezuela has Chavez whose communism is destroying that country.  Many other major oil companies around the world are either partially or wholly government owned.  This leads to terrible management.  Mexico and Venezuela are both examples of this.  The profits are used for government projects instead of investing back into the business and thus the companies and their oil production declines.

Add all this together and combine it with the fact that one of the greatest growth stories in the oil industry is happening in Canada, and you have an explosive opportunity.  The Canadian oil sands is one of the largest deposits of oil on the planet.  The problem with them is that this heavy oil is found in sand and so the cost of drilling/mining is more expensive than traditional West Texas Light Sweet Crude.  It generally costs about $40/barrel to bring to market.  (Exxon Mobile is the lowest cost producer at under $20/barrel.)  This means that when oil prices were at $40/barrel only a couple years ago, it was impossible for these companies to make a profit.  However, at $80/barrel, they can make a very nice profit.  When the price is over $100/barrel, they really sing!  If you believe in the global demand story for oil and particularly if you believe that continued war and government mal-investment across the world will cause higher prices, then these Canadian oil sands could be the ticket to large profits.

The same can be said for the massive development in the Eagle Ford in South Texas where new technologies have made it possible to produce enormous amounts of oil in what was previously a passed over oil field.

Factors such as these should be considered when investing or speculating in oil related investments.  We’ll look at gas and coal next.  If you have any thoughts or questions on this or other topics, please let us know.

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