Over some painfully uninspired eggs, burnt toast, and multiple cups of coffee, we spent the better half of two hours solving the world’s problems.

He shared his opinions on America’s long-term commitment in Iraq… I voiced my concerns regarding Moscow’s capacity to intentionally disrupt energy supplies for political capital.

He quickly responded, “Why do you think America is even in Iraq?”

I laughed…to beat the Chinese to the oil, of course. He laughed.

He certainly didn’t disagree or show much concern. Maybe he knew something I didn’t…maybe he was privy to the possibility of a Russian/Iranian natural gas cartel. Those two countries alone hold nearly half the world’s natural gas reserves. Russia alone stands as the world’s top natural gas producer and No. 2 in oil.

It’s common knowledge that the world’s major oil reserves rest in the most politically sensitive regions of the world…countries like Iran, Russia, and Venezuela…countries that fear American foreign policy.

Consequently, oil’s value has increased well beyond its day-to-day commercial uses. Nations, especially those with limited influence, are leveraging their oil reserves for political capital. This practice has become a global trend that doesn’t seem to be ending any time soon.

This very week, the International Atomic Energy Agency (IAEA) now fears Iran may use Revolution Day (February 11) to announce plans to install 3,000 centrifuges to enrich uranium.

Who’s to stop them? We’re stretched so thin in Iraq that even Admiral William Fallon, the White House’s choice to command U.S. forces in the Middle East, believes that “There are no guarantees” on the success of America’s mission.

American resolve seems to be waning. And public sentiment in Britain certainly doesn’t seem to support aggressive actions in other Middle Eastern countries.

Even though French President Jacques Chirac officially retracted his remarks “If Iran had one or two nuclear weapons, it would not pose a big danger,” the message was loud and clear. Europe, Russia and China still want to avoid any direct confrontation.

Some fear a Nuclear Iran will cause other Middle Eastern countries to follow suit. I’m not suggesting we extend our military commitment in the Middle East… However, I am suggesting that this seemingly probable chain of events will only send the price of oil in one direction.

Ironically, many of the world’s major producers (Iran, Iraq, Nigeria, Russia and Venezuela) may support this.

Their domestic money pool hinges on the price of crude oil. The higher the price, the more funds they have to propagate their nationalistic agendas. This practice has been especially well received in both Russia and Venezuela.

As for the Middle East, aside from an overwhelming abundance of sand, oil stands as the only sustainable natural resource. And the major producers know their reserves won’t last forever. Setting the maximum possible price floor serves OPEC’s best interests. Why sell it for $40 if someone will pay you $60?

You may be wondering… Why haven’t the ministers of OPEC done this earlier?

In short, it’s the rapid growth of India and China pushing a sustainable increase in global demand. Consequently, Asia’s entry into the global struggle for the world’s limited energy resources has dramatically decreased excess supply.

So aside from potentially explosive geopolitical concerns, we’re still in a new era where oil supplies will constantly be challenged. Oil producing countries in the Middle East and Latin America are fully aware of this. OPEC ministers may be signaling an intention to support a price floor of approximately $60 a barrel.

All of this tells me the days of cheap oil are behind us… $60 is the new $20.

Unfortunately, major integrated oil and gas isn’t the best place to look for small-cap stocks. However, the oil and gas drilling and exploration sector offers plenty of options.

One stock in particular is Pogo Producing Company (PPP: NYSE) out of Houston, Texas. Pogo Producing engages in the exploration, development, acquisition, and production of oil and gas both onshore and offshore. The company continues shifting its focus to onshore North American oil and gas production.

This business appears to be selling at a very attractive price.

Margins are great. Revenue growth remains strong. Liquidity isn’t ideal and we must note that the company does carry a bit of debt. But the balance sheet certainly isn’t out of order.

Shaky supply lines from major producers in the Middle East, Russia and Venezuala should push demand for greater domestic exploration and production. And even if oil rests in less politically sensitive climates, the influx of Chinese and Indian players into the global energy shopping spree makes domestic production even more attractive.

One of the few certainties circling the world right now are that oil is in great demand. It’s no longer cheap to drill and refine…and it’s not going to get any cheaper.

Sincerely,
Christopher Hancock
February 2, 2007

P.S.: Don’t stay on the sidelines and miss out on the huge profit potential of options any longer…not when you have the chance to get on board with this expert guide and his astonishing “double your money” potential in average gains on every pick since 1999. Gains from 1999 to 2006 totaled more than $1.33 million.

Trends in Global Oil Production was originally featured in the Penny Sleuth.