How to Buy Crude Oil for US$2 a Barrel

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Oil is selling at US$72 a barrel.

Our friend James Ferguson believes that one of the best ways to get rich now is to do what Jean Paul Getty did in the 1930s – buy oil in the ground. The basic idea is that oil has become a lot more expensive than it was in the Clinton years – nearly seven times more expensive. But the price you pay for a major oil company stock may not be seven times higher.

Some large, high-yielding, blue chip stocks are actually trading below where they were seven years ago, says James, “even when some of them have more than doubled earnings since then”.

Royal Dutch Shell is currently trading around US$80 a share. If you bought the whole thing, plus net debt, it would cost you about US$287 billion. But the “downstream” business of Shell – refining, marketing, transporting, power, etc. – is worth about US$174 billion according to Morgan Stanley.

That means that the rest of the business – the oil in the ground – is worth US$113 billion. Let’s see, the company has proven reserves of 11.8 billion barrels. That’s US$9.58 each. And with oil at US$70 above ground, these reserves are worth a lot of money.

But keep in mind that there are rules for reporting “reserves”. The SEC tells Shell what it can call a proven reserve and what it can’t. It also has “2P” and “3P” reserves – probable and possible. Altogether, it could have 30 billion barrels of 1P, 2P and 3P oil. That works out to US$3.76 a barrel. And Shell’s private estimates of what it owns is even more optimistic – it believes it has proven, probable and possible reserves of 60 billion barrels. At today’s share price, they’re available now…at less than US$2 a barrel.

If J. Paul Getty were alive today, says James, he’d be buying.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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9 Comments on "How to Buy Crude Oil for US$2 a Barrel"

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James P. Buttafuoco
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Vaalco energy has 6 billion barrels of proven reserves of crude oil[according to sec filing] and 59 million shares of common stock trading at app. $6.30 on 7-29-2008 which works out to app 63 cents per barrel of proven crude oil reserves. Now that is a bargain price for oil.

Andrew Kalldin
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So how do I invest in this oil and then turn a profit and how long does this take?

Andre Johnson
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How can I with limited funds becomewealthy with oil?

King Modo
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I think am gonna try this out.

Ross
Guest

King Modo, try typing “Shell cuts reserves” into google to see their track record on estimates claims before applying the math. There is better scrutiny on the high risk smaller players that don’t need to start wars be it invasion or civil religio-ethnic to get their share. On that latter risk, loved the way the FIRB gave the quick tick to the Chinese takeover of AED and shortly thereafter the Timor reserves disappeared. Still thinking along the smalls lines however and mulling over TAP.

Coffee Addict
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Hi Ross: The small plays have (so far) done well by me AND you can buy oil in the grough much cheaper than what the big guys can offer.

What’s your take on the Hu trial? Clearly the Chinese have aligned the trial with an opportunity for Tom Abanese to bow prostrate on the ground and offer the Chinese a new way forward (sounds like great leap forward). Everyone saves face, Hu and his team get off lightly, RIO gets on with business and nobody has to suffer further statements from the Australian Government.

Cheers

Coffee Addict
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Crude costs upwars of USD35 pb to produce in the US. Gas is in the vicinity of 2 to 4 dollars per cubic foot. So although you may only pay a dollar or two per barrel (or equivalent) you still have to pay to get it up and out of the ground. Technological innovation (eg horozontal drilling, new fraccing techniques, 3d seismic imaging, continuous tube casing etc.) is reducing some of these costs in some areas. Investors need to do some research to determine which underpriced companies can get at their P1, p2 & P3 reserves quickly and cheaply. cheers
Ross
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CA, if I had dipped my toe in as deep and read as widely as you in that sector I might be more sure of my ground. But starting from my deflationary bent though you worry about energy demand and more particularly the financing of that demand … see I almost talked myself out of it already! Ultimately though I get to a base where I agree on higher future relative value in energy on a paper currency basis, but then I might get greedy and say that a deleveraging security deflationary event (like 08 repeated) should determine my timing… Read more »
Matto
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yeah have to agree with coffee addict, would like to see some extraction costs pb on this. uhm lets see, “i have X proven reserves ready to go in the far north of the alaskan wilderness… cheap as chips mate!”

not saying its not viable but this kind of rudimentry research and support to the overall proposition would kind of add a bit of ‘weight’ to argument.

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