Investing in Oil Futures

Oil and gas are non-renewable resources that have fueled economic growth to a large extent over the years. Oil and gas are considered essential goods which will probably not be consumed less anytime soon or currently have any substitutes to speak of. These factors make them an example of “price inelasticity of demand”. They cannot be consumed less or have any substitutes. Even if the prices increases, the consumption would not decrease (to a point).

If we believe in the Peak Oil Theory, it is a must that we invest in oil and gas. The supply has peaked in the recent years; however the demand still continues to grow strongly.

Importance of Oil Products

As most of us are aware, crude oil, one of the most vital sources of energy, is being exhausted worldwide. The Mid-East is just not able to cope with the ever increasing demand of gas and oil supplies. Oil and gas are being consumed faster than they can be refilled.

The consumption of oil and gas is greater than what is produced in the same timeframe. The world produces approximately 85 million barrels of crude oil a day while the consumption is 87 million barrels each day.

Depletion of Oil and Gas

The demand and consumption of oil and gas have increased many times over, and the resources and production are depleting at a fast pace worldwide. As the resources and production decreases, demand and prices will increase drastically.

Industry analysts feel that the decline in production can be as high as 13% in the coming years. The year 2005 is considered as the global peak oil period. This would mean that we have already reached the peak of the curve and are now on a slide down. The graph below depicts the Peak oil depletion cumulative published by the Association for the Study of Peak Oil and Gas.

Peak oil depletion cumulative
Peak oil depletion cumulative published by ASPO
[Association for the Study of Peak Oil and Gas]

Investing in Oil Futures

Oil prices are going to multiply in the next few years as the demand and consumption rises. The current prices would seem very low when compared to 10 years from now, assuming no new alternative energy sources became competitive.

It is expected that growing countries like China and India will increase their annual consumption by approximately 10% every year. Such enormous annual increases in consumption can be adequately met only for only a few years. As the shortage or demand increases, there will be a huge increase in prices.

Though there are strict SEC guidelines to book reserves for oil and gas operators, members of the Organization of the Petroleum Exporting Countries [OPEC] do not have any such guidelines. Hence, the claims about the oil and gas reserves by these countries cannot be verified by any external resource with proper evaluation. This being the case, there are chances that these countries have overstated their actual reserves. This issue has been widely accepted by many oil and gas experts.

Oil reserves have also started depleting. Larger and older reserves are running out of oil or are becoming exceedingly difficult to extract with oil wells getting deeper and deeper. The last notable oil discovery was at Kazakhstan which was some years ago. This shows that even discovering new resources has also become difficult, or we can say we have already discovered and exploited all possible oil reserves.

Hence, investing in the oil futures market at the current “relatively” low prices would be more profitable than many other investments.


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