The world has run out of cheap oil

Trend: Oil will getting more expensive as most of the cheaper sources have been found and tapped.

Jim Jubak at MSN Money assesses the current and future supply of oil. Excerpts below.

Link: The oil squeeze has just begun - MSN Money

Peak oil, a theory put forward by American oil geologist King Hubbert, describes what will happen as the world moves toward a peak in oil production from conventional sources. Big fields will decline -- at first gently and then rapidly. New finds will become smaller. Finding new oil will become more difficult and more expensive. Producing oil from declining older fields and from these "geologically challenged" new fields will be more difficult and more expensive. The marginal cost of each additional barrel of supply will climb even as it becomes more and more difficult to add enough new barrels to keep production growing.

Look around. Cantarell, the world's second-largest field, is in decline. Kuwait's Burgan field, another top-five field, is showing signs of maturity. The world's biggest field, Ghawar in Saudi Arabia, is either already in decline or is likely to start declining within a decade. Since 1990, only one new field, Kahagan in Kazakhstan, has been discovered that might pump more than 500,000 barrels a day at its peak.

Technology has indeed expanded supply. The percentage of wells drilled that go into production climbed in the 1990s to 45% from 25%. Enhanced production technology has increased the amount of oil that is recovered from an oil field to as high as 60% in some cases, from 20% just a decade or two ago.

But all of this means that we're replacing the cheap oil of the 1990s with expensive oil. The new reserves, the new supplies that result from this technology, the unconventional sources of oil such as Canada's oil sands -- all of these come with higher production costs than the supplies they are replacing. As recently as 1997, the net wellhead cost of Saudi oil was 95 cents a barrel. I've seen estimates that say producers in Canada's oil sands will need oil prices of $60 a barrel to make a 10% profit.

You can debate whether the world is running out of oil all you want. It is certain, however, that the world has run out of cheap oil.

Almost any oil stock will profit from that scenario, especially if the company owns oil still in the ground. In an era of rising prices for oil, such companies are sitting on an appreciating asset.