IF YOU THOUGHT LIFE IN THE DESERT OF THE REAL SUCKED, TRY OIL EXPORT LAND.

HINT: IF YOU WERE BORN IN AMERICA BEFORE 1970, YOU ONCE LIVED IN ONE.

John Mauldin runs an investment firm and publishes a newsletter entitled “Investors Insight”. A recent edition is entitled “What the Export Land Model Means for Energy Prices”. The actual article is written by David Galland of Casey Research. The article extensively relies on the work of Jeff Brown, an oil expert.

First, a little energy price increase background. Prices are going up because demand for oil is outstripping supply. And according to Brown, the world hit peak global oil production in 2005. Some more goodies:

• On April 15, 2008 the Russians, the world's second largest oil exporter, announced that their oil production appeared to have peaked, with production in the first quarter of this year declining for the first time in a decade. If they have indeed peaked then, based on the ELM, the world could lose Russia's current ~7 million barrels a day in exports within 6 to 9 years.

• Echoing the baseline premise of the [Export Land Model] ELM, Herman Franssen, president of International Energy Associates, projects that Iran, the world's fifth largest exporter, may consume an amount equal to their exports by 2015. A prominent oil analyst, the late Dr. Ali Samsam Bakhtiari, estimated that Iran is either at or near peak.

• Most concerning, this April Saudi Arabia's King Abdullah announced they were not going to raise oil production above 12.5 million barrels a day. Commenting on the news, Tom Petrie, vice president of Merrill Lynch, said

"King Abdullah's quote speaks to the fast-emerging reality of what I call 'practical peak oil.' The Saudis and other exporters are placing a new emphasis on elongating the petroleum exploitation and depletion cycle. This stems from a growing awareness of the challenges of conventional resource maturity, as well as rising resource nationalism. This is likely to result in an earlier occurrence of global peak oil output than many consumers yet recognize."

THE ONE-TWO COMBINATION.

The Export Land Model has two pieces. First, the exporting countries hit peak oil production and then production starts to decline. After that, production declines by about 5% per year.

The second effect is that domestic consumption in these exporting countries rises. It typically rises 2.5% per year. It seems like yesterday that the world was awash in North Sea Brent Crude oil.

You don't have to have an awful lot of gray hair to remember the excitement around England's massive North Sea oil fields. While discovered in 1969, it wasn't until well into the 1980s, on the back of surging oil prices, that the fields came into full production. Turning up the taps, the United Kingdom (as well as Norway and Germany, who also have North Sea production) became a significant exporter of oil.

But then, in 1999, something happened: the UK's North Sea production hit peak ... that tipping point after which reservoirs go into decline, setting in motion both reduced production and progressively higher costs related to extracting the remaining oil.

While the experience of North Sea oil production provides yet another useful example of the validity of the Peak Oil theory, what concerns us today is a critical but usually overlooked aspect of the discussion, exports.

At the time the North Sea peaked in 1999, the U.K. was exporting 1 million barrels of oil per day. By August 2004, it had become a net importer. What happened to cause the situation to turn around so quickly?

THE US WAS THE EXPORT LAND TEMPLATE.

In 1956 they said, if Lower 48 [United States] ultimately recoverable is 150 billion barrels, then the US would peak in 1966. If the recoverable oil from the Lower 48 ultimately came in at 200 billion barrels, then the US peak would come in 1971. The higher-end estimate probably turned out to more accurate, and the U.S. peaked in 1970.

But the point is this: a one-third increase of estimated ultimate recoverable - a total increase of 50 billion barrels - postponed the peak by all of 5 years."

Read that again. A one-third increase in US oil supply postponed peak oil by only FIVE YEARS. Five years.

The Arctic National Wild Life Reserve mean estimate of 7.7 recoverable barrels is merely a tailpipe burp.

THIS IS A BIG TOPIC. SO MORE IN THE NEXT POST.

In the next post, the author will continue this topic and include some graphs that support the Export Land Model. And draw an analogy from the world rice market. Additionally, the Author will provide an investment idea or two.

IT’S IN THE WIND IN THE DESERT OF THE REAL!