I am personally not one of the Peak Oil disciples who religiously argue that we are imminently running out of oil. However, I do believe that Hubbard Peak Oil theory, which I have discussed in this column previously, is a significant issue to consider.

I will not go into the details of the theory again, the information is easy enough to find on the web, but my interpretation of Hubbard Theory is not that oil is about disappear as an energy alternative, but that it will become harder and harder to find. This means it will get more and more expensive.

Saudi Arabia is on record as saying that it does not believe that Peak Oil has been a factor in price rises over the last few years. It puts the spike in energy prices down to a lack of refinery capacity, but they would say that, wouldn’t they?

I always take statements from Saudi Arabia about oil reserves and supplies with a pinch of salt. I advise you to do the same.

I agree that refinery capacity shortages have been a factor in price rises. However, if the Saudis are right - and it’s all down to a refinery shortage - the upcoming construction of a significant amount of refineries in the Middle East will mean that the oil price should fall by a large amount over the next 10 years.

If that happens, I will be utterly astonished. In fact, I will eat my hat – and yours too.

An Iranian talking sense

World oil production will decline because depletion is outstripping new discovery and reserve growth. Dr Ali Samsam Bakhtiari, an oil analyst who works for the Iranian national oil company, recently said that he believed that the world’s daily oil output will fall from its present level of about 85m barrels of oil per day to around 55m barrels of oil per day by 2020.

That’s actually quite staggering. It means that, if his predictions are correct, there will be a 35% decline in available conventional oil within a mere 13 years.

The fact that he is an Iranian makes this very interesting indeed. Iran holds around 9% of the world’s known oil reserves, so oil is very important to its future. He has not taken the Saudi line of denial, denial, denial.

Declining oil production, however, does not mean we are running out of oil. That’s just as unreasonable a position as the one taken by Saudi Arabia. 55 million barrels per day is still a lot of oil. It’s just going to get harder to find and extract. These factors will combine to make the oil price move higher; and probably by a significant amount.

This means that new reserves of oil will become more and more valuable. This will benefit the oil companies that have a stake in the reserves, but oil services companies will also have a license to print money through drilling services, downhole logging, well completion services and production monitoring.

Lower risk

The main advantage of an oil service company over an oil explorer is that these companies carry no geological risk. It does not matter to them if a hole that they drill is dry or not – they will still get paid for drilling the hole. As oil becomes more and more scarce, their services will be in greater demand.

Oil service companies are not in the business of owning - or even attempting to claim title to - any oil in the ground anywhere. That means that the political risk associated with oil explorers is virtually irrelevant.

Take Russia. The former communist state managed to browbeat Royal Dutch Shell into surrendering most of its share of the Sakhalin-2 project. Another example is the nationalisation of foreign oil company assets in Venezuela.

However, the new owners of these assets following their grab will still have to get a drilling rig from Abbot Group, buy deepwater engineering services from Wood Group and well completion services from Halliburton.

As oil discoveries fall, this should not hit oil services companies businesses too hard – if at all. Drilling a dry well is no disaster for the driller, they merely hope the oil company will pay them to drill another. A dry well for a field’s operator, however, is an utter disaster.

Are you into oil services yet? P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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