Demand will drive oil above $75 US per barrel, consultant says

Canada only non-OPEC country whose production growing

By Ray Turchansky, Edmonton JournalMay 29, 2009

Citing Canada as the only non-OPEC country whose oil production is increasing, veteran oil observer Henry Groppe of Houston joins a growing throng predicting oil will average at least $75 US a barrel in the near future.

As he has almost since starting the oil consulting firm Groppe, Long & Litell in 1955, he ignores weekly inventory numbers and uses the fundamentals of production and consumption to predict trends.

Speaking to Richardson Partners FinancialinEdmonton, Groppe, 83,says reduced world production will cause oil prices to continue climbing.

Inthefall of2006,theInternational Energy Agency forecast there would be an increase in non-OPEC oil production during recovery from hurricane Katrina, so OPEC countries reduced their output. But in 2007 there was no increase in non-OPEC production, and oil rose from$34 to $147.50 US a barrel.

"Now the Saudis are repeating the same mistake for a different reason," saidGroppe. "Inthemiddleof'08,everybodysaidthefinancialcrisiswould cause a collapse in oil consumption, andtheSaudisagainbeganreducing production."

As oil climbed from$34.50 a barrel inDecembertothe$62range, Groppe combinedwiththeMiddlefieldGroup to start the Groppe-Middlefield Energy Fund in May.

"This time it's an extraordinary set of circumstances, and it's the most profoundinvestmentopportunityI've seen in my entire career."

He notes that some seven billion people in the world use oil products daily, ranging from plastic baby bottlestojetfuel, andthere's"continually declining capacity."

Whileoptimisticobserverspredicta recoveryfromrecessionintheUnited States will start as soon as this August, Groppe says it would take the Saudis eight more weeks to ramp up production, taking us at least until October.

And, saying that a reduction in consumption won't match a reduction in productionforalongtime, hepredicts oilwillaveragebetween$75and$100 US a barrel for the next decade.

"The glory days for big new discoveries were the '50s and '60s. By 1980, the finding rate fell below our consumption. Now 45 per cent is produced by OPEC producers. In the U.S., in the 39 years since 1970, our production has declined 50 per cent, and during that time the price increased 25 times, and the U.S. uses a quarter of all the oil used in the world today. It is the biggest part of our unsustainable continually rising trade imbalance.

"The two biggest oil reserves in the world are in Saudi Arabia, about 260 billion barrels of recoverable oil, and the oilsands in Canada, now estimated at about 180 billion barrels, but that's a lot tougher to get at."

He said the world uses half the oil produced in transportation fuel --gasoline, diesel and jet fuel. The second largest use, 27 per cent, is for stationary fuel in buildings for lighting, heatingandairconditioning. The Iran oil crisis in the 1970s caused the U. S. and Western Europe to develop coal, nuclear energy and natural gas substitutes for stationary fuel. Now China is doing the same, meanwhile developing refinery units to process stationary fuel into gasoline and diesel, sotheydon'thavetoincreasetheir oil production.

Asked about the plans of fellow Texas oil baron T.Boone Pickens, 81, to lead a conversion to wind power energy, Groppe laughed.

"I think it's all baloney. He's an active client of ours, I argue with him once a week. I've been working with him for 25 years. On the wind, he's launching one of the biggest projects because the subsidies are so great. He's got a lot of ranchland of his own in West Texas and he's not building a singlewindmillonhisownranch. But he'sdoingagreat job of puttingthese issues up on the public agenda."

Although Groppe cites problems in storing energy from the sun and wind, and terms government subsidiesforethanol" atravesty,"heagrees reducingoildependencyandincreasing the use of alternative energy is a must for survival of the planet. But first, he says, the United States has to save itself.

"(President Barack) Obama did something totally unique. Because we'vegot somanyproblemsfrom40 years of borrowing, he put them all ontheagenda--healthcare, education, energy, infrastructure--and he's saying to the voters, you decide what's most important to you and how much you want to spend. We think the priorities are going to be healthcarefirst--inHouston47per cent of residents have no access to healthcare--andeducationisequally bad, the drop-out rate in Houston is 50 per cent of the residents age 18 have never finished high school.

"I'menthusedabouttheU.S. future finally, because we were on a path that was a disaster, and it's really being turned around.We've been in denial for a long time. I'm hopeful we're asking the right questions in all our problem areas."

As for having been consulted by the government of Alberta's energy department, Groppe terms its royalty structure "a continual work in progress."

Ray Turchansky, a freelance writer and income-tax preparer, writes

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