Fuel for the Fire

Story Highlights:

• BP made headlines this week with its announcement of a "giant" oil reserve find in the Gulf of Mexico.
• Bringing oil to the surface and distributing it to the demanding world is no easy feat, which bodes well for continued supply constriction.
• The constriction of supply is bullish for Energy sector stocks.

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Just as a fire needs fuel, a growing economy needs energy. Much debate rages about what the right mix of energy sources should be—but whatever your view, the world isn't going to start using less oil anytime soon. Quite the reverse, as the world, led by emerging markets, returns to growth mode. Add growing demand to constricted supply, and you have a recipe that should prove bullish for oil-related energy firms, at least for the near future.

But don't confuse "constricted" for "dwindling." In recent years, new technologies have broadened the horizons for deep sea oil exploration, leading to several massive new discoveries. India's largest oil discovery was announced in 2004—with 3.5 billion barrels of recoverable oil. Since discovering the fields in January 2006, Uganda's Lake Albert Rift Basin and Ghana's Jubilee fieldhave also been sites of major oil developments. In 2007, an estimated eight billion barrels were found in Brazil's Tupi discovery—the Western Hemisphere's largest oil find in more than 30 years. And, this week BP made headlines with its announcement of a "giant" find in the Gulf of Mexico—this "Tiber" field is estimated to hold more than three billion barrels of oil equivalent, though perhaps only a third is recoverable.

Rather than dwindling, it sounds like a glut of new supply ready to come online and crater prices. However, these discoveries can take years before oil is actively extricated. After years of potential political wrangling, getting an oil field active can take massive commitments—of time and capital. For example, Tiber is under nearly two miles of water—one of the deepest oil wells ever drilled. Previously, the Gulf of Mexico's Perdido development was the deepest oil drilling site—located about 200 miles offshore. To access the oil, engineers installed production systems nearly 10,000 feet below sea level, drilled another 8,000 feet into the seafloor, laid hundreds of miles of underwater pipelines, and constructed a floating production system as tall as the Eiffel Tower. Discovered in 2002, construction on the production facility began in 2006, and the first drops of oil aren't expected until 2010.

While current oil reserve estimates may be on the low side, innovation will likely yield still more oil discoveries in the years to come—making once "unrecoverable" oil in existing fields recoverable. Available supply will likely remain constricted, though supply in the ground seems abundant. Firm demand and constricted, not dwindling, supply—should prove bullish.