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Royal Dutch Shell plc, BP plc And The Oil Crunch

In the 1990s, oil was in plentiful supply and was dirt cheap. But in the 2000s, the oil price started to increase. By the middle of this decade, the oil price had reached $100 and, suddenly from a plentiful supply of oil, people were talking about peak oil and the end of oil.

Peak oil theory says that the supply of oil increases as more and more oil is discovered, and extraction techniques improve. But, at a certain point, this supply peaks and then falls, as increasing consumption depletes these reserves and there are fewer new discoveries to be made.

Oil prices are high, but oil company profits are falling

The recent results from both BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) seem to confirm the peak oil view. Oil is running out faster than reserves are being discovered. Although demand is high and increasing, oil companies are finding that they can’t meet this demand as supply is diminishing. Thus we are finding that, although oil prices are high, oil company profits are falling. We are approaching an oil crunch.

What’s more, this effect is more pronounced for oil majors like BP and Shell. Most of the world’s oil is now being produced by national oil companies in the Middle East, Russia and Latin America. Companies such as BP and Shell are finding it increasingly difficult to find sources of oil outside of these regions, searching for oil in remote regions such as the Arctic and the depths of the oceans.

That’s why I have sold my shares in BP. I am more positive on Shell, particularly as much of its profits are actually from the booming gas industry. But even with Shell, I am considering selling.

The only oil company I am buying into

The energy industry is rapidly evolving. Increasing oil demand and decreasing supply mean that people are searching for new sources of oil. That’s why my pick in the oil sector is now Suncor, the world’s leading oil sands producer. Oil sands — once seen as too expensive and hard to extract — are suddenly now viable. This may be one of the only ways we will be able to meet future energy demand as the global car industry booms.

But this may also be the point where people move from oil to other sources of energy. There has recently been a flurry of electric car launches from car companies. The future is arriving far more quickly than we ever thought.

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> Prabhat owns shares in Suncor and Royal Dutch Shell.