To cut or not to cut?

At first, OPEC’s decision not to cut production gave me pause. As you know, I (along with everyone else) expected to see the cartel slash output even further. Yet when the time came to pull the trigger, OPEC hesitated.

The decision seemed admirable, considering another cut would have caused oil to spike again. After my initial pause, I began to picture how the market would take the news. Surely a drop in crude was on its way, right?

Today the markets once again proved confusing. As expected, I watched oil prices fall as low as $43.62 per barrel this morning. By mid-afternoon I looked on as oil rebounded, threatening to move over $48 per barrel.

Lowering output is still likely, however. Don’t forget OPEC still has to reduce output levels by nearly a million barrels per day to meet their targeted production.

Let’s also remember the reason why OPEC is in the industry in the first place: Money. According to the EIA, OPEC pulled in a hefty $970 billion in net oil export revenues during 2008. Those revenues are expected to drop to $383 billion this year and $510 billion in 2010. That means the cartel’s revenue could drop 60% this year. Any way you slice it, you know they’re going to feel that pinch.

Now add all of the political rhetoric about liberating ourselves from foreign oil. Whenever we talk about eliminating that foreign oil, we’re talking about the Saudis. After all, there’s not much we need to do to get rid of our Mexican oil (our third-largest source of oil). The Cantarell field’s production outlook is helping us accomplish that feat all by itself. I completely agree that Mexican imports will vanish by 2015.

That leaves us with our other major importers: Canada and Saudi Arabia. It begs the question, "When was the last time you heard an uproar over Canadian imports?"

Naturally, there are only two ways to cut our thirst for foreign oil. Either we develop alternative energy sources to make up for the loss of energy from those imports, or we drastically boost domestic production.

I’m sure Americans are all for developing those alternative sources, but we are nowhere near ready to replace the equivalent of 12.3 million barrels per day, the amount of oil we imported during the first week of March.

Time to Pay the Piper

"There’s always our domestic production," you say? That’s what I’m told time and again.

I like to think my readers know better than that.

But things get a bit tricky whenever you bring up the future of U.S. oil production in a positive light. As you know, U.S. production of crude oil has been spiraling down the drain for the last three decades. You would be absolutely amazed at how many people don’t realize this.

Sadly, it’s the truth.

Take a look for yourself at our crude oil field production, courtesy of the Energy Information Administration. We haven’t had a year-over-year increase in production since 1985— seventeen years ago!

If you really want to see for yourself how dire the situation has gotten, take another look at that production table.

According to those EIA figures, U.S. production averaged approximately 3.96 million barrels per day last September. The last time U.S. crude production dipped below 4 million barrels per day was in May 1943!

Our problems don’t end there.

Ever since oil prices began their precipitous drop from July’s, there’s been one theme I’ve witnessed repeatedly. Not a week goes by that I don’t see some new project get delayed or even canceled. I’m sure you’ve heard about exploration budgets being slashed across the board.

So here’s my question, "If spending all that money while oil prices climbed to $147 per barrel resulted in an overall decline in production, how bad do you think things will get when companies are drastically cutting their budgets?"

The Bakken Shale

Okay, things don’t look so good for completely eliminating our addiction to Saudi oil. But no matter how gloomy your outlook is for our overall crude production, there’s still a bright spot for investors.

Unless you’ve been living under a rock for the last decade, there’s a very good chance you’ve heard about the Bakken oil play. In fact, the Bakken shale has helped North Dakota become one of the few areas in the country where production is on the rise despite the financial pit we’ve dug ourselves into.

While U.S. oil production fell nearly 400,000 barrels per day over the last five years, production in North Dakota has almost doubled. Now, that doesn’t mean the state’s production is immune to the 70% drop oil prices have experienced since July. The number of rigs drilling in the state has fallen to 51 (compared to the 93 that were operating several months earlier).

As long as you remain confident on long-term oil prices, you won’t find a better buying opportunity than right now. Looking back, oil prices appear to have bottomed out around $32 per barrel. And now that oil prices may be breaking the $50 threshold again, I can’t help but feel optimistic.

Meanwhile, nearly every energy company I’ve come across has been beaten to the ground. Of course, you don’t need to take my word for it. Some of the prominent Bakken drillers, like EOG Resources (NYSE: EOG), are trading at a significant discount.

The Bakken is only one of the areas in the oil industry with room to grow. Next week, I’ll fill you in on the only other place where investors can take advantage of the next energy bull.

By Keith Kohl
Energy & Capital