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What You're Not Hearing About the Coming Offshore Drilling Ban

By Matt Badiali, editor, S&A Resource Report
Thursday, May 13, 2010

Several months ago, I published a research report on the Strait of Hormuz, the narrow waterway that runs along the Iranian coast.
Around 40% of the world's oil supply moves through this "chokepoint." That oil is pumped from the fields in the Middle East, loaded onto ships, and sent to Asia, Europe, and North America.
In case of a shooting war with the U.S. or Israel, military strategists see a huge risk in Iran attempting to close this waterway. Even a partially successful attempt to close the Strait of Hormuz could double oil prices... which would make for economic disaster.
The Strait of Hormuz remains a major danger zone for the global oil industry. But right now, it's taking a back seat to the Deepwater Horizon oil disaster, which is one of the worst ecological catastrophes in American history.
The second largest oil spill in history occurred at PEMEX's "IXTOC 1" well. That was the last time a massive blowout occurred in the Gulf of Mexico (yes, it's happened before). Mexico's state-run oil company let 3.3 million barrels of oil leak out before they got the well plugged.
It will take 20 months for that much oil to leak out of the current well. We're at 22 days right now, roughly 110,000 barrels – or half the size of the Exxon Valdez spill.
What will make this spill so devastating is its proximity to land. Louisiana could lose its entire oyster industry forever. Its shrimp and fishing industries will be shut down for years. The cost of this catastrophe will be well over $10 billion once the losses of industry and tourism are factored in.
I expect this horrible accident will result in a ban on offshore drilling.
I also expect it to provide a long-term tailwind to one of my favorite areas for investment: the Athabasca oil sands.
Before I tell you why, it's vital to keep in mind the United States' four largest sources of foreign petroleum. Currently, they are 1) Canada, 2) Mexico, 3) Venezuela, and 4) Nigeria. (You read that correctly... No Middle Eastern country is even in the top 3. Saudi Arabia is No. 5.)
In April, I told you how Mexico's national oil company, PEMEX, is a bastion of incompetence and corruption. Venezuela is a basket case run by a lunatic. And Nigeria regularly deals with unstable governments and terrorism. Now, let's get back to the first country on our list...
Alberta, Canada's Athabasca oil-sand deposit is the world's largest source of stable, sure oil. At current prices, it holds around 200 billion barrels of recoverable oil (a reserve that is second in size only to Saudi Arabia's).
Oil coming from this deposit is what makes Canada the largest crude exporter to the U.S. From a geopolitical standpoint, it's a beautiful thing for the U.S.
Canada is a stable country. Also, there's no offshore drilling involved. And no terrorism. There's no need to ship the oil over thousands of miles of ocean. We know the oil is there, so there's no risky exploratory wells to be drilled...
Nope... the Athabasca deposit is just a huge swath of oil-soaked Earth a quick pipeline ride away from your gas tank. The Horizon disaster shines more light on just how valuable having this deposit is. The less we rely on offshore drilling, the more we must rely on the bounty of Athabasca... and the more investment interest in big oil-sand players like Suncor (SU) and Canadian Oil Sands Trust (COS.UN on the Toronto Exchange).
The two big offenders in the Horizon spill – driller Transocean and giant British Petroleum – have suffered stock price drops of 25% and 19%, respectively, since the accident. "Crisis investors" are jumping into these stocks in the hopes of a rebound.
I'm holding off on "crisis investing" right now. These two companies might make for attractive stock buys. But it's too early in the blame game for me to risk my money. I'd rather take the sure bets.
In this case, it's Athabasca.
Good investing,
Matt Badiali

Further Reading:

Athabascan oil is one way to profit on a coming oil crunch... another is home-grown "unconventional" energy assets, like the Eagle Ford in south Texas. As our colleague Porter Stansberry writes, "I expect Eagle Ford to yield more than $2 billion in oil and gas by 2013 and to increase steadily for at least 20 years." Read more here: How to Buy the Biggest Oilfield Left in Texas.

The U.S. is not the only country looking to tap huge, on-shore hydrocarbon deposits. China, in particular, is starved for energy assets. Lucky for them, they've got an untapped "monster" basin that could put U.S. fields to shame. And lucky for a few select companies, China needs help tapping it. Get the story here: China's Giant New Energy Source.

Market Notes


Today's chart is proof that when gold and silver move higher, the returns in gold and silver stocks can get ridiculous.
About a year ago, our colleague Matt Badiali told his S&A Resource Report readers to buy shares in Silvercorp Metals, one of the world's elite silver stocks. Silvercorp mines several extremely rich silver deposits in China. Matt saw the stock as a way to profit from a bull market in gold and silver, plus China's mushrooming demand for the stuff.
At the time of his recommendation, Silvercorp shares traded for around $3.25. Silver has climbed about 25% since then. In an incredible example of the leverage gold and silver stocks offer to the underlying metals, Silvercorp has almost tripled during the same time.
How much higher could Silvercorp go if gold and silver continue their bull markets? Let's just remember legendary speculator Doug Casey's observation: The gold and silver stock sector is tiny compared to the rest of the market... and a widespread rush to buy these companies would be like "trying to siphon the contents of the Hoover Dam through a garden hose."

The gains in silver stocks are getting big...

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