Oil Forecasting Legend Paints Dire Energy Picture

TORONTO (ResourceInvestor.com) -- While Matt Simmons' work is recently more widely publicized, Henry Groppe has been accurately forecasting oil price trends for the last 55 years. His latest views agree with those of Mr. Simmons, and paint a dire picture of a "permanently changed situation". Indeed, Groppe says, "We think were headed for an energy crisis."

Background

Henry Groppe founded Groppe, Long & Littell in 1955. He has 55 years of experience in the oil, natural gas and petrochemical industries, including positions with Arabian American Oil Company, Dow Chemical, Monsanto and Texaco. He is a fellow of the American Institute of Chemical Engineers and has served as a charter member of the Texas Governor's Energy Council and a director of the United States Energy Association (the U.S. member committee to the World Energy Council).

The company's clients include some of the largest oil & gas, integrated, chemical, financial, oilfield services, and pipeline utilities in the world - not to mention several world governments.

Some more recent examples of their successful forecasting track record include:

  1. Calling the top for oil in 1980 when everyone thought prices were going to $100 per barrel.
  2. Calling a persistent gas bubble in 1986 when the consensus was that it would be over within 12 months.
  3. Predicting long term gas prices rising to $4-$5 per MMBTU in the early 1990's as the Department of Energy said prices would be steady to lower, in the $1 per MMBTU range.
  4. Between 1998 and 2000, successfully forecasting both the drop in oil prices to the $10 per barrel range, and their subsequent quick ride back to $30 per barrel.

Groppe says his accurate forecasting record is "based on two fundamentals - and our view is that given enough time the fundamentals always prevail. That has enabled us to relatively accurately identify all of the major turning points in the last 30 or 40 years. Petroleum fundamentals are first - depletion. From the moment you drill your first well into a field and begin producing, you are physically depleting that finite source, and it is just a question of time until you've produced it all. The second is that exploration is a very rational process. Experienced people use the best technology, go after the biggest deposits first, the easiest to find, most profitable, and it always gives you the classic production history curve."

Simmons

As seen recently in these pages, Matt Simmons in his new book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, predicts "prices surging to progressively higher plateaus." He says, "The peak oil discovery year was 1965. 2005 is now being marked as peak sustainable production."

Going forward, his predictions are gloomy "there's a better chance we'll be living on the moon [than find enough oil to sustain current and projected demand]. Oil will peak and it is not renewable."

On the whole, seasoned veteran Groppe seems to agree with all of this.

Are the numbers real?

As an aside, well-regarded and prescient analyst Don Coxe recently cited for Basic Points readers a fascinating report by the Association for the Study of Peak Oil and Gas, which refers to 1985 when OPEC members were "competing with each other to be allotted bigger OPEC quotas." Coxe writes "OPEC has always allotted quotas to members in proportion to their proven reserves. Kuwait's geologists must have had a pretty good year, because their reserves climbed from 64 bn bbls to 92 bn. But the Kuwaitis were pikers compared to their brethren in the Emirates, who said that, upon reflection, they needed to boost their reserves from 31 bn to 92 bn. Not to be outdone, Iran announced its real reserves were 93 bn, up just a tad from a previous 47 bn. The 1985 champ, though, was the savvy Saddam, who was not content with double digits: his reserves went to 100 bn, up slightly from the previous 47 bn." According to the Association for the Study of Peak Oil and Gas, those reserve figures remain today.

What does Groppe think now?

Groppe says that we are at "a major turning point for world oil and north American natural gas." According to this veteran, "We've been down a long road of exploration and exploitation and found everything easy. We've reached the point where all the major initial discoveries have reached their peaks and are declining. The newer ones are too small to offset it, and North American natural gas production has clearly peaked and is irreversibly declining. We think were at that turning point for world oil. From now on we're in a new era where the key question is what prices will be required to cause consumption to decline to match an irreversible decline in supply?"

A critical question, and here Groppe seems to feel a little bit better about the situation than Simmons. "We think it requires a minimum of $50 for WTI to balance the system, and it will take time to determine how much above that is going to be required. And for the US natural gas market we think it will require prices in the range of $6.50 to $8.50 during the next 10 years to balance our supply demand system."

At the same time, he reiterates that "for the first time in our history we are now at the point where the huge complex worldwide oil business is operating at total capacity, with every prospect of staying there from here on. Therefore any disruption in supply, or concern about disruption in supply, is going to create very very volatile surges in price on the upside."

Indeed, Groppe says, "The difference this time, in our view, is that we are going to have sustained higher prices. In the previous energy crises the big run up in prices produced significant reductions in consumption and significant supply responses, particularly by non-OPEC producers. That is no longer possible, and we think the consumption response is going to be lesser this time because all of the easy things were done previously."

"We think this is a real turning point because of so many years of exploiting what we'd already found, and the disappointing rate of new discoveries... in the last 35 years over $1.5 trillion was spent outside OPEC, and the three largest discoveries in that period were all under water. At peak each will only produce 1.5 million barrels per day, roughly equivalent to only one year's depletion decline in base current world oil production."

This is worrisome, as according to Groppe "New finding rates in the US peaked in the 30s and 40s, and on a worldwide basis, finding rates peaked in the 50s and 60s." The math is quite simple and shows us how unsustainable the present environment really is. Right now "we're using 2 to 3 times as much as were finding."

Where can investors hide?

An interesting point for investors is that, Groppe says that as a result of the Iranian Revolution, "something like 30% of the value of the S & P in 1980 was the energy sector, and today its more like 6%-7%, and significantly last year the energy sector generated 23% of all of the earnings of the S & P 500." "We expect it to rise to the 15%-20% range" in the future.

Going right along with this bullishness on the energy sector, and historical low point for the weighting of the energy group in the S & P, Groppe says, "I think the easy oil has been found, but in general, in our work, we conclude that oil and gas assets are still significantly undervalued based on the long term price outlook that we see."

To get a little bit more specific, Groppe's favourite group is the Canadian oil patch. "We would classify Canada as perhaps possessing the most attractive combination of circumstances for energy investment of any place in the world. It is only a quarter as intensely drilled and exploited as the United States" and "I suspect that in the next several years the oil sands reserves will be raised to be higher than Saudi Arabia's." In that same vein, Groppe predicts "within 10 years we have Canada as being the largest non-OPEC producer in the world outside of Russia."

The man puts his money where his mouth is, and says that "90% of all of my equity investment assets are in energy, and 65% of that is Canadian." He also says, "We think there is still a good long run ahead with the kinds of prices that we see", which should be a positive, and somewhat comforting for investors in the area, considering Groppe's enviable and unmatched oil forecasting record, both in longevity and accuracy.

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