Betting on Growing World Energy Consumption

My bias towards oil and gas investments is really obvious when you look at my portfolio. Being in this sector is not only a question of personal preference; it is a solid investment case for the future. It is a case confirmed yet again by the EIA (US Energy Information Administration) which released a report earlier this week forecasting an increase in world energy consumption by a staggering 53% in less than 3 decades.

Here’s the interesting part of the report; world use of petroleum and other liquids is expected to grow from 85.7 million barrels per day in 2008 to 97.6 million barrels per day in 2020 and 112.2 million barrels per day in 2035. That’s a growth rate of 1.4% per year or a total of 46% in 27 years. Transportation (read cars, think India and China adding drivers by the millions each year) will still account for the lion’s share of petroleum usage in 2035 unless a significant technological breakthrough alters the transportation sector. For those amongst you with flashing “Electric Vehicle” signs in their minds please read my opinion about it in What about electric cars and Why Electric Cars Won’t Kill Oil Anytime Soon. That doesn’t mean that EVs won’t be the change everyone is hoping for, it just means the change might not happen as fast as you’re hoping for. Remember how in 1980 everyone imagined flying cars would be a dime a dozen in 2000? Well, my Corolla was manufactured in 2005 and I assure you it doesn’t fly. You might think 2035 is far but it’s really not that far, so it shouldn’t be surprising if fossil fuels are still the main energy source for the transportation sector.

world energy consumption 2008-2035

source: US EIA – International Energy Outlook 2011

World GDP growth obviously is the key to this forecast. The EIA expects that by 2015, most nations in the world will have resumed their expected rates of long term growth with the world GDP rising by an average of 3.4% per year from 2008 to 2035 which is similar to the rate recorded over the past 30 years (3.3% per year). The champions of growth are not surprisingly emerging countries such as China, India, and Brazil. Their income is rising and they are increasingly spending as every year millions of people graduate from poverty to middle class status coveting the same items people in advanced economies take for granted.

world gdp growth forecasts 2008-2035

Source: US EIA – International Energy Outlook 2011

The GDP projection is bold in light of the current turmoil the world economy (read Europe + USA) is going through. All we hear about right now is the doom and gloom in Europe and the US but sooner or later, the economic uncertainty will have to end somehow either through a painful reset following default or through slow economic growth for years to come (key word here being growth). In both cases, we will get through it and the sun will continue to rise every morning and apple fans will still line up in front of stores to fork out their dollars on the latest iphone while pessimists will still be hoarding gold, guns and ammo waiting for the final collapse. If you are truly pessimistic and expecting the worst, may I suggest you start hoarding cattle as well, it will come in handy as it provides you with a steady flow of dairy products; it’s like a dividend paying asset!

These days my portfolio is not very pretty to look at but even if my stocks get trashed further in the coming months there will be 1 outcome: the market will have to reflect the increasing demand for oil sooner or later in stock prices. Natural declines in global oil production has to be replaced from more expensive and harder to reach sources. Oil production has to rise in order to satisfy an ever growing demand which current prices are still reflecting in spite of the bleak outlook. Who is better placed than my Canadian energy companies for tapping conventional and unconventional resources? Canada and the US have a great opportunity to benefit immensely from the technological revolution that unlocked massive amounts of unconventional resources (shale oil and gas, tight oil and gas) and I am standing in the middle of it.

What’s your take on the energy sector and how are you positioning yourself to take advantage of the supply/demand dynamics?