Oil Investing

China has now passed the United States as the world's largest importer of oil.

Chinese oil consumption now surpasses production by 6.3 million barrels per day, which means the country has to import that much to fill the gap.

Now that's a big deal on its own, but remember that a decade ago, China wasn't even importing a significant amount of oil and now it's importing more than the US.

That's a major shift in a small amount of time and it's only one reason, cheap oil will not be reality for much longer.

When you consider emerging economies growing their standard of living, which requires more fossil fuels as they develop their economies, that's even more demand from old fields that are drying up and new fields that are outrageously expensive to develop.

What's more, the world is still a risky place where any dislocation of the delicate balance in energy supply and demand has enormous implications.

Here I explore why it's time to start thinking of how to profit and thrive in a world where $150 a barrel oil isn't an outlier or headline story, but a simple reality.

Drill All You Want... Oil Prices Headed Higher

Let me tell you why some people on Wall Street (not to mention some highly misinformed TV pundits) are completely wrong in their oil price assessments.

A lot of this sentiment stems from the idea that we have now increased our supplies here in the United States.

This is, of course, true. Output has surged across the country, from the Bakken to Eagle Ford to the Permian Basin. (Texas is on pace to issue the most drilling permits since 1985.)

And the EIA predicts that imports share of the U.S. oil supply will fall to 39% next year, the lowest since 1991.

Clearly, all this activity will create real opportunities for investors.

But none of this will drive the price of oil down.

Today, prices are not just reflective of new supplies, either too much or too little. By focusing only on how much is there, these analysts provide a fundamentally distorted view of the oil market.

Yes, the rise of new sources has altered the picture. But so has the rise in demand globally and at a rate much faster than anticipated.

In fact, the impact of unconventional oil (like our huge sources of shale oil) is now projected to be less than expected, even with additional volume coming on line.

Fundamentals What Matter to Oil Prices

We are not alone in believing that oil prices are set to rise, not fall, in this age of expanded oil and gas.

Bernstein Research, regarded as the top energy research company in the world by institutional investors, concluded oil prices will be rising to $158 on average for Brent in London, and about $153 for West Texas Intermediate (WTI) in New York before the end of the decade, with a concerted upward trajectory kicking in early next year.

And that's just the average price. Spikes will carry it much higher, and much faster than projected.

Bernstein also flatly dismisses the protracted effect some television pundits think is coming from shale oil. While it will have a much more pronounced result in North America, the unconventional will have a more subdued effect on prices elsewhere in the world.

The estimate is that the overall impact of the "new oil" will comprise only 3.2% of worldwide supply at the beginning of the next decade, with most of that occurring in the U.S. market.

Remember, this is a global market.

Global demand and availability determines price, with that price translated to the market by the dominant benchmarks - Brent and West Texas Intermediate (WTI).

So what price should we expect oil to be at this fall?

Energy Experts, OPEC Members Reveal New Baseline Oil Prices

Recently I met with multiple ambassadors from the Gulf Coordination Council. They represent the oil interests of the Persian Gulf.

So we're talking OPEC folks here. They told me they have to maintain a minimum... a minimum... price of $125-a-barrel to maintain the economies of the Middle East.

That means, without any other factors in play, that'll be the lowest oil can ever go again.

But we know that there are always other factors that come into the oil game. That's why I believe that $150 a barrel will be the "new norm" very soon.

When this baseline price is set, the impact on investors will be enormous. Before we look at the best way to play oil's increase in price, here are three more forces set to send oil soaring.

Force # 1: The World's Rapidly Expanding Oil Addiction

The International Energy Agency (IEA) recently estimated that worldwide fuel consumption will rise to a yearly average of 95.7 million barrels a day in 2017, up from 89 million in 2011. It has also forecast that world oil output will rise by 1.5 million barrels a day each year to 2017... reaching 102 million barrels a day.

Right now there is no question the U.S. is the world's thirstiest nation on earth when it comes to oil consumption, consuming more than 19 million barrels a day, double the amount China currently consumes, and six times more than India.

But such a huge disparity won't last much longer. The areas that will directly affect the price of oil are definitely not North America and Western Europe.

Middle class societies around the globe, especially in China and India, continue to grow dramatically. It won't be long before 7 billion people around the world will want to live off the hog just like the Americans do, driving big cars and burning up a ton of energy every single day.

Between now and 2035 you'll have 90% of the world's population growth and 90% of the energy growth coming from emerging markets. Think of how much oil they will need to keep their societies running!

As global demand continues to build, sources of supply have also changed.

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Force #2: The Era of "Cheap Oil" Is Over

It's amazing that in the time since we kicked off the industrial revolution, we have basically extracted all of the easy energy there is to be had using our past, current and near-future technologies.

There is no getting around this. New oil doesn't appear magically overnight. And neither do new oil refining processes.

Today, finding conventional oil has become harder and harder. It's either deeper in the ground, or farther offshore. Wells alone are costing more than 10 times what they did just a decade ago.

We just don't get the major oil finds anymore like we used to. The press went crazy when another big oil well was discovered in the Campos Basin in Brazil. As much as 250 million barrels of oil are believed to be there. But that would represent a fraction of what we found in oil's heyday.

When it comes to forecasting future oil prices, one ratio to look at is called the Energy Return on Energy Invested, or EROEI. It simply measures how much energy it takes to get energy out of the ground.

In the 1930s you could get about 100 barrels of oil out of the ground for every barrel you used. By 1970 that figure was 25-barrels-to-1.

Today, we're only getting about 3, maybe 5, barrels of oil, for every one barrel of energy we use to extract it.

In a nutshell, that means that oil has become incredibly expensive to get out of the ground. Ultimately, for oil companies just to meet their margins, the price of oil will have to come up exponentially.

Force #3: Unconventional Oil Costs Are Sky-High

Today the world uses about 89 million barrels of oil a day, up from about 72 million barrels in 2004 when conventional oil production hit its peak. And as we discussed earlier, this number is set to increase dramatically over the next decade.

So how do we fill the gap?

The answer is we are now turning to "unconventional" sources to make up the difference.

We're talking about the rise of shale and tight gas and oil, coal bed methane, heavy oil, bitumen, and synthetic (upgraded) volume from oil sands.

In terms of meeting future supply demands, this is extremely exciting. These new sources offer real hope for America realizing true energy independence, while opening up some eye-popping profit opportunities for investors.

In just the last three years alone Texas has seen a 230-fold increase in their output of crude oil that's derived from shale. That's about a 23,000% spike, coming mostly from the Eagle Ford basin.

And the Bakken oil shale formation in North Dakota is among the largest ever found.

According to a recent study by Advanced Resources International, Bakken oil shale production will surpass 1 million barrels a day in 2015, eventually peaking at about 1.45 million barrels a day in 2020. In fact, earlier this year North Dakota surpassed Alaska as the second leading state in crude oil production, trailing only Texas.

Although unconventional oil sources currently only represent about 3% of global supply, the IEA projects that will more than double by 2020.

The only problem is this: Unconventional oil source costs are much higher than conventional costs. Cost of production is mostly to blame.

You see, unconventional sources cost a lot of money in technology - and resources to recover. The more drilling in shale fields and tar sands, the more water, pipeline, and machinery must be used. And those costs add up quickly.

In addition, the infrastructure for these new sources (pipelines, roads, etc.) will take years to build and cost global energy companies a fortune. These costs will naturally be passed on at the pump - meaning higher prices for oil and gas around the world.

But this is creating an incredible profit opportunity for you...

The Best Way to Profit From Rising Oil Prices

If you want to make money investing in energy, you need to park yourself right in the middle of the supply chain.

I'm talking about "midstream" companies. These remain the single best way to profit off energy companies as global demand and energy prices continue to rise.

Midstream companies are the segment that connects the "upstream" exploration and production companies to the "downstream" retail, refining, and marketing channels. This part of the energy value chain includes pipelines, gathering facilities, storage, initial processing, and terminal services for oil and gas.

By owning companies involved in the center of the supply chain, you're far less susceptible to price fluctuations in the underlying commodity. What's more, you are able to collect easy profits from the growing demand in fuels.

Simply put, this is the "Sweet Spot" of energy investing.

This is the place where we can collect hefty dividends and position ourselves for big appreciations in share prices, as more oil and gas is pulled out of the ground around the world.

The best way to play the midstream is with Master Limited Partnerships (MLPs).

These companies are integral to America's energy boom and MLPs will once again be the hot approach to owning midstream assets, in general, and pipelines, in particular.

MLPs have outperformed the markets for years. Since January 2007 the Alerian MLP Index has gained 65.7% compared to 28.4% for the S&P 500 over the same time.

Plus, MLPs usually offer dividends with yields of 5% or higher, more than double the market average.

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