Oil Your Portfolio

Oil experts have been warning us for years that in the near future the supply of oil will be unable to keep up with demand. This information is available from a variety of public sources including the U.S. Energy Information Administration. The government contends that are approximately 1,000 billion barrels of oil worldwide (A Trillion Barrels) in reserves. At the current rate of worldwide consumption one could assume that the oil will last 40 years. And by then we will have found more, or better yet, alternative fuel sources - so no worries…

Wrong!!!

This estimate makes several critical and false assumptions:
First, it relies on distorted estimates of reserves. Some oil experts have placed the world oil reserves at only 500 billion barrels. Since it is nearly impossible to measure the reserves, only educated guesses can be made.
By adding up all the figures provided by all the private oil companies, the world oil reserves shows only 500 billion barrels. There are some 18,000 oil fields worldwide. Each oil company reports the size of each field. There is no way to determine whether these estimates are padded or accurate. The U.S. Energy Information Administration relies on these private reports to create its own reserve estimates.

A second mistake is to pretend that production will remain constant. As a well reaches 50% empty the pressure of the oil field decreases to near zero making it necessary to pump the oil out, slowing the production down considerably. Generally, the slower the oil is pumped the more economical it is to produce. Eventually the oil becomes too expensive to pump and the field is abandoned. We can immediately subtract 10% to 20% of the world's oil reserves as unproducable. Hence we should not count it. If we believe that there are only 500 billion barrels and 20% is unproducable, that puts the available reserves at 400 billion barrels.

Third, - as well after well reaches this 50% point, (the pressure point), the world production of oil will begin to decrease, putting more demand on pressured wells shortening the time these pressured wells reach their pressure point. The result is the beginning of a rapid overall decline in world oil production when only a few large wells have reached their pressure point.

Forth and most important, it assumes that world oil demand will remain constant. As China industrializes an estimated 1 billion addition cars will be consuming oil, 4 times as many as the US, putting world oil demand at 3 times what it is today.
The candle is burning at both ends. OPEC in beginning of 2004 decided to reduce oil production because many wells are reaching the pressure point. President Bush convinced OPEC to keep production levels high and return the levels to previous levels. As the wells run dry the oil will become more and more expensive to pump, eventually OPEC will have no choice but to slow production.
We know that 800 Billion Barrels have already been produced and burned in the world to date. So from this we can conclude that we are just past the pressure point. Oil production will have to slow to remain profitable. How soon? Not within years but months.

So assuming there are 500 biliion barrels of oil left, then we can substact 20% of this oil as unproducable leaving 400 billion barrels, this gives us a 16 year supply, with a growning world demand for oil we can reduce the supply to 10 years. with slowing production we can reduce it even further.

As oil production begins to slow prices rise proportionately.
From an economic perspective this is devastating. Oil is the lifeblood of the US economy. Consumers will have less money to spend and they will be buying products which cost more due to higher transportation costs. The Auto industry will suffer economic hardship as sales slump. Especially sales of gas guzzling SUVs.

As the economy slows the dollar will begin to lose value. The Fed will want to raise interest rates to strengthen the dollar but it will also want to keep rates low to stimulate the economy. The scenario is not pretty. World production of oil will decrease 10% within the next year. Prices at the pump will hit $4 within this years and $5 within 3 years.

Hardest hit from rising oil prices and rising interest rates will be the real estate market- an economic bubble created by decreasing interest rates.

Here's what happened: - Declining interest rates have allowed home buyers to afford higher priced homes pushing the price of houses up faster than the ratio of price to income ratio. Buyers 'panic buy' as they see home prices rising and buy heavily leveraged pushing the demand up even higher. Currently the ratio of income to price is 3:4 which is 20% higher than historical averages. By all definitions this is a bubble. By these historical standards prices should fall by 20%, but now we can add both rising oil prices and rising interest rates to the equation.

Rising interest rates is a double-edged sword. First it means new home buyers can afford less and less cooling demand for new home purchases. Second it means current homeowners who bought with variable rate loans will pay more for their mortgages. Both of these conditions will cool the economy. Third and most important is the psychological factor. The instant homebuyers think prices are dropping they stop panic buying, they stop buying period! Using the same psychology they did when panic buying, now homebuyers will not buy in a declining market. Down she comes. Foreclosures increase as heavily leverages buyers cant cope with the addition burden, further cooling the market.
A downturn in the housing market means a downturn in the economy as all home-related services generate less revenue. Home building, mortgaging, selling, improvement. Less refinancing means less money poured into the economy, stimulating an economic slump. In other words a slump in the real estate market creates an economic slump.
According to experts a 10% decline in home prices will cause a 2% decline in the economy. This is because the housing industry and the money released into the economy through the housing industry is 20% of the total economy
In conclusion: oil prices are now at their lowest, interest rates are now at their lowest and home prices are at their highest right at this moment. So what should we do???

The solution is to sell all heavily leveraged real estate and invest in South Chine Sea oil exploration companies. The best company to invest in is Husky Oil. Husky is a small cap Canadian based company, aggressively searching for oil in the South China Sea. Here are news releases from Husky:
Husky owns several South China Sea oil leases and is planning on wildcat drilling within the next few years. They also have several partnership agreements with CNOOC to explore for oil in the region. Here a 2 major news releases from Husky:

News Release
For immediate release December 6, 2002
Husky Energy Continues South China Sea Expansion
Calgary, Alberta - Husky Energy Inc. announced today that it has signed another petroleum contract with China National Offshore Oil Corporation (CNOOC) for the 40/30 block in the Pearl River Mouth Basin of the South China Sea. The block is located 100 kilometers south of the Wenchang 13/1 and 13/2 oil fields, and 400 kilometers southwest of Hong Kong. The new block is 6,704 square kilometers (approximately 1.7 million acres) in size, in water depth averaging 600 to 1,500 meters. A single exploration well is required on the block in the first three years of the contract.
"Our interests in the South China Sea are a key component of Husky's long-term growth strategy," said Mr. John C.S. Lau, President and Chief Executive Officer of Husky Energy. "The 40/30 block is our fifth petroleum contract with CNOOC and provides Husky with a deep water exploration play to diversify our development and exploration portfolio in China."

In September, 2002 Husky announced that it had signed petroleum contracts for two exploration permits in the shallow water Beibu Wan Basin, north of Hainan Island, and within 80 kilometers of the Weizhou oil fields. Husky holds a 100 percent interest and is the operator of all its South China Sea
exploration blocks. CNOOC has the right to participate in any development programs with a 51 percent interest. Husky Energy Inc. is a Canadian-based integrated energy and energy-related company headquartered in Calgary, Alberta. Husky is a publicly traded company with shares trading on the
Toronto Stock Exchange under the symbol HSE.
Certain information contained in this release may contain forward-looking statements. Husky's annual report to
Shareholders and other documents filed with securities regulatory authorities describes the risks, uncertainties
And other factors, such as changes to business plans that could influence business reports.

July 26, 2001, China National Offshore Oil Corporation (CNOOC) signed with Husky Oil China Ltd the petroleum contract for Block 39/05 in the Pearl River Mouth Basin of South China Sea. Husky Oil China Ltd. is a subsidiary of Canadian Husky Energy Inc.
It is the second Petroleum Separation Contract CNOOC signed with foreign oil companies this year. So far CNOOC has signed 148 petroleum contracts with 70 companies from 18 countries and regions worldwide.

Husky to drill first deep water well in Chinese waters
11-09-03 Canadian oil and gas company Husky Energy is expected to drill the first deep water well in Chinese water, in the western South China Sea, by the end of this year, a top official with the China National Offshore Oil Corporation said.
CNOOC sees good hydrocarbon production prospects in that area of the South China Sea, and aims to double oil and gas output there in the next three years, from an annual 700 mm cm of oil and gas equivalent now, said Zhu Weilin, President of CNOOC's subsidiary.
Zhu also said CNOOC has sweetened its production-sharing terms to encourage more foreign investment in China's deep water oil and gas exploration in the South China Sea.
"CNOOC will share the risk in the exploration period, which is longer than in shallow water blocks," he said. "It (Husky) is looking for rigs now to drill the well. Drilling is expected to start late this year," he said.
Husky's well will be the first one drilled in China's deep-water areas, which by definition means water deeper than 500 meters. Husky signed a $ 10 mm production-sharing contract with CNOOC last December to explore the 40/30 Block in the Pearl River Mouth Basin.
This was the first and only deal so far resulting from CNOOC's tender of 12 deep water blocks for international investment made in February 2002. The Block is about 100 km southeast of Hainan Island, covering an area of 6,704 sq km, with water depth ranging from 600 meters to 1,500 meters.
The contract calls for three phases of exploration beginning with a 1,600- meter exploration well. The minimum spending on exploration is about $ 10 mm.
Zhu noted that for shallow water areas, foreign companies now take 100 % exploration risks in China, meaning that if they don't make commercially-exploitable finds, they lose their investment costs.
CNOOC avoids such risks by only getting involved when foreign companies make commercial discoveries. For new deep water prospecting, CNOOC will provide up to 30 % of exploration costs, he said.
Zhu said CNOOC is now negotiating with several foreign companies on other deep-water blocks delineated in February 2002. He said foreign companies are likely to form consortia for joint oil and gas exploration and production in these areas, in order to reduce their exposure. CNOOC will also increase seismic surveying in the deep-water areas, he said.
"We will conduct three-dimensional surveys and get to know the (oil and gas) structures better," he said.
Also, CNOOC will start developing some of the marginal blocks discovered over the last few years in the South China Sea. These efforts were expected to raise its oil and gas production in the area by 60 % or 100 % over the next three years, he said.
"We had shelved the development of these marginal discoveries in the past due to cost concerns," he said. Now CNOOC is going to rework the development scheme by grouping these discoveries together and using common exploration and production facilities to make the development feasible, he said.
Husky plans to invest $1.8 billion in its upstream assets in 2004,
including $1.15 billion in Western Canada. Activity in Western Canada will
Focus on natural gas exploration in the British Columbia and Alberta
foothills, northeastern British Columbia and northwestern Alberta, and oil
Exploration in the Central Mackenzie area of the Northwest Territories.

The 2004 East Coast expenditures of $585 million include the construction
of the White Rose Floating Production, Storage and Offloading vessel, and
drilling of the East Coast development wells for Terra Nova and White Rose
projects. In addition, one offshore exploration well is planned to be drilled
in the South Whale Basin, located approximately 350 kilometers south of St.
John's, Newfoundland.
In the year 2004, international expenditures of $65 million include the
planned drilling of at least two exploration wells and additional seismic
programs in the South China Sea and East China Sea as well as three
development wells at Wenchang.
Capital expenditures in the midstream segment are planned at $100 million in 2004 primarily for debottlenecking initiatives at the Lloydminster
Upgrader.
For the year 2004 production guidance, Husky estimates production of 320 to 350 thousand barrels of oil equivalent per day. Light oil and natural gas liquids (NGLs) production is estimated at 67 to 76 thousand barrels per day, medium oil is estimated at 35 to 40 thousand barrels per day, heavy oil
production is estimated at 105 to 115 thousand barrels per day, and natural
gas production is estimated at 670 to 710 million cubic feet per day.
Husky Energy is a Canadian-based integrated energy and energy-related
company headquartered in Calgary, Alberta. Husky Energy is publicly traded on
the Toronto Stock Exchange under the symbol HSE.
Certain information in this release may contain forward-looking
statements. Actual future results may differ materially. Husky's annual report to shareholders and other documents filed with securities regulatory
authorities describe the risks, uncertainties and other factors, such as
changes in business plans, estimated amounts and timing of capital
expenditures, drilling results, the uncertainty of estimates and projections
of future production, that could influence actual results. Husky assumes no
obligation to update forward looking statements should circumstances or
management's estimates or opinions change.

Conclusion:

To protect your portfolio against a housing slump and higher oil prices, put some Oil in your portfolio. Husky is the best play in this drama.

Currently I own several thousand shares of HSE, and I sold most of my real estate holding.
I am not a licensed securities dealer