Why Invest In Energy?
Currently the world produces and consumes about 85 million barrels of oil a day. The recent worldwide economic downturn has affected this demand, and supply is contracting accordingly to accommodate this decline. However, prior to this, world demand for energy has been increasing steadily at a rate averaging about 2% per year. The worldwide recession will end at some point, and then economic growth will again rely on energy and the availability of it. Even without economic growth, we still have human population growth which is increasing conservatively at a rate of 1.4% per year. This will alone have an effect on demand. To put this into context, if we just resume our rate of energy demand, growth prior to the downturn the world oil consumption alone will be over 130 barrels a day by 2030, and our need for natural gas and electricity will jump by 50%! This will still leave 50% of the world’s population with little to no energy supply.
Depending on whose numbers you use, the world passed the peak of oil discovery between 1962 and 1964. We now find only one barrel of oil for every 3 we produce, and this ratio is only getting worse. The fields we are now discovering are progressively smaller and in more remote and geographically challenging locations. Seventy percent of our daily oil supply comes from oil fields that were discovered prior to 1970. The U.S. reserves have been in decline since 1972, thereby increasing crude oil imports by an average of more than 4.7% annually since 1985.
The current administration has pledged its commitment to weaning our country off the reliance on foreign energy sources. While they may be overly optimistic with their projections on the timing of such a transition, it is evident that more reliance on domestic oil and especially natural gas will come about as a result of their initiatives and leadership. No matter what strategy is eventually used, this will put a premium on domestic oil and natural gas.
Most professional economists and financial analysts agree that a result of the massive government spending currently going on will be some level of inflation in the near future. Many believe it could be severe inflation, possibly hyper inflation. Investors of all ages are affected by inflation because of the way it diminishes one buying power, but no one is more hurt by it than seniors. Investors can combat this best by owning hard assets. Domestic oil and gas royalties are two assets that history shows are outstanding assets to own in inflationary environments.