Keith Fitz-Gerald

Why Every Investor Needs an Energy Strategy

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The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody's fancy only 24 months ago.

Now we're seeing Royal Dutch Shell (RDS.A), StatoilHydro ASA (STO) and Petro-Canada (PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez -- the perennial motormouth and longtime U.S. critic -- is eating crow. He's begrudgingly invited (read that to mean "is begging") the oil companies whose assets he nationalized only a year ago to "come back" into the market.

He has no choice. Venezuela's oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country's hard-to-reach reserves.

Chavez's government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country's state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there's simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn't matter whether the decline is prompted by depletion, war or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on, but I think you get the picture.

What Lies Ahead

Now imagine what could happen to oil and gasoline prices when normalized demand resumes.