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by Joseph Dancy, LSGI Advisors, Inc.

Adjunct Professor, SMU School of Law
April 7, 2006


The following news items drew our attention last month. We think the long-term trends they portend for the economy and energy sector are positive:

In addition to the news items mentioned above, veteran energy analyst Henry Groppe granted an interview last month with the Financial Post. Mr. Groppe has 55 years experience in the business and a very accurate forecasting record in the energy sector, and heads an energy consulting firm Groppe, Long and Litell out of Houston. We found his comments on the energy sector supported our long term bullish position on the energy sector:

Q: How much control does OPEC have over oil prices now?

A: Let me put this into perspective. We view the history of the oil business in three major eras. The first one lasted 100 years, from 1870 to 1970, during which the United States controlled world oil prices. It's interesting to note that over that entire period, on an inflation-adjusted basis in 2004 dollars, the price of oil averaged US$13 a barrel. That period ended in 1970 because that's when the United States reached peak capacity.

For the next 40 years it was an era of transition, with OPEC in control for most of that time. They replaced Texas because they had the only incremental production that could be used to affect market prices. That era, in our view, came to an end a couple of years ago when total world oil production essentially reached capacity, so it's out of OPEC's hands now.

Q: What does this new era look like?

A: We're now moving rapidly into the new era, which I call an era of scarcity and price rationing. Just as U.S. production reached an all-time peak in 1970, it has now declined 50% since 1970 -- and nothing has been able to reverse this decline. One by one, the major producing countries have been reaching the same turning point. From this point on, total world crude oil production is going to slowly and irreversibly decline.

However, there's growing production of liquids related to the international gas business, in the form of condensate, liquefied petroleum gas (or LPG) and, toward the end of the next 10 years, increasing production of the synthetics. That wedge of growing natural gas liquids will roughly offset the decline in oil, so we'll have a stable total world petroleum supply.

© 2006 Joseph Dancy

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