The concept of “Peak Oil” is becoming the conventional wisdom among global investors this decade. After all, it’s difficult to deny we’re reaching maximum oil production, when crude prices continue to hit new inflation-adjusted highs.

Technically “Peak Oil” is defined as the point when the world is producing the maximum amount of oil, and then faces a declining long-term trend in overall annual production while demand steadily rises.

The majority of oil-producing countries, regions and companies increasingly cannot replace their annual production of crude oil, natural gas and other distillate fuels. As China and other emerging markets rapidly industrialize and consume record amounts of crude oil, demand has exceeded production by about two million barrels per day or 87 million barrels.

From its low in late 1998, at about US$10 per barrel, West Texas intermediate crude oil has skyrocketed more than tenfold in price. This incredible price increase makes oil one of the best performing commodities in the world.

On Monday, another blast of bearish news for oil producers hit the markets. Russia announced that oil production has probably peaked in Western Siberia, home to one of the world’s richest concentrations of oil.

After Saudi Arabia, Russia is the world’s second largest oil producer.

According to Leonid Fedun, vice-president of Russia’s largest independent energy company, Lukoil (OTC-LUKOY), oil production in 2007 - roughly 10 million barrels per day - would be the maximum he would witness “in his lifetime.”

The Russian government, however, has been reluctant to admit Peak Oil has arrived. But on Monday, even its energy minister, Viktor Khristenko, conceded that “the output level we have today is a plateau or stagnation,” according to Financial Times.

Despite the dual confessions in Russia, crude oil is opening higher this morning in New York at US$113.39 a barrel, another all-time high. Meanwhile, it was interesting to learn that as Peak Oil slams into Russian production in 2008, Brazil’s oil industry is about to boom.

Petroleo Brasileiro, or Petrobras (NYSE-PBR), Brazil’s largest oil company, announced it has discovered a reservoir that might harbor one of the world’s largest oil fields.

Located off the Brazilian coast, Petrobras speculated that this new discovery might potentially result in a massive 33 billion barrels of new crude. The stock surged more than 8% yesterday on the news, with other oil companies in the region joining in on the rally.

About two years ago, Chevron announced it discovered a potentially lucrative oil reservoir in the Gulf of Mexico. Coined “The Shales,” the reservoir requires a huge capital expenditure commitment to extract, much akin to Alberta’s tar sands. This expenditure includes drilling rigs, which are now in a supply deficit as contractors continue to flee for larger deals in the Middle East and Africa.

New oil, even in Brazil, will not alleviate supply concerns in the long term. The majority of companies are still reluctant to spend vast sums of money to extract oil. They fear a replay of the post-1980s bear market that resulted in bankruptcies, foreclosures and over expansion as prices peaked. Although Big Oil cautiously continues to spend more to discover and recover what reserves remain in the world, it’s fair to assume that, apart from what lies off the coast of Brazil, the world has probably juiced whatever significant supplies exist.

For the moment, oil prices are in a “bubble.” China, of course, continues to increase its oil imports to the tune of 27% year-over-year, while U.S. consumption is flat or down about 2%. I have a pretty hard time buying into US$100-plus oil amid a serious economic recession in the United States and, eventually, a slowdown overseas.

Oil belongs closer to US$75, not US$113 a barrel.

ERIC ROSEMAN, Investment Director

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