Q: I saw that Nigerian oil output is going to fall… Doesn’t America import oil from there? What are the ramifications? – D.C.

A: The ramifications are, we could be in trouble.

A recent story in the Financial Times covered the possibility that Nigeria’s crude oil output could fall by a third in the next seven years. The problem is, Nigeria is one of the top five foreign oil suppliers to the U.S.

Here are the latest numbers from the Energy Information Administration:

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Now let me show you that same table from a scary perspective… the change in production levels from 10 years ago, and one year ago.

As you can see, our primary oil suppliers are suffering production declines… except for Canada. The major reasons Mexico, Nigeria, and Venezuela are faltering are lack of investment and government mismanagement. The major reason Canadian production is increasing is the development of its gigantic tar-sand deposits.

So… the short answer to the Nigerian question is “yes… this is bad for the U.S., and it signals higher oil prices.” But so does the decline of Mexico’s Cantarell field and the idiotic ramblings of Hugo Chavez.

Basically, any bad news you read from these regions is just more of a buy signal for the safe, vast deposits of Canada.

Q: Did you see that a rocket hit a Japanese oil tanker in the Middle East? Will that affect U.S. oil prices? – J.S.

A: Absolutely. Attacks on oil tankers, drilling platforms, and pipelines are all too common today. That’s because they make easy targets for any group with a cause and some easily-purchased explosives. What better way to hold a country hostage than to threaten its energy infrastructure?

And now look where you’ve gotten us, J.S., we’re right back to the answer above. We’re right back to Canada.

Canada is sitting on a huge oil reserve with a “no risk” transport route to the world’s largest consumer. Caribou generally do not engage in the destruction of oil infrastructure.

Q: What oil companies will benefit most from the high oil prices? – A.L.

A: In a recent DailyWealth, I covered the benefits of investing in government-backed oil companies, like Brazil’s Petrobras. I think these are big beneficiaries of $117 per barrel of oil.

These majors have many of the benefits of investing in a “non government-backed” oil company like Chevron, except they have huge backers behind them when it comes to securing resources at less-than-competitive rates.

Brazil doesn’t entertain outside offers for its choice of offshore drilling blocks. These are some of the most promising offshore fields in the world, they’re getting more valuable by the day, and they’re reserved for Petrobras.

And let me throw this curve ball in here… natural gas producers.

While the price of natural gas has increased about 40% in the past 12 months, the price of crude oil has skyrocketed 80%.

Natural gas and crude oil can be substituted for each other in some applications, so high crude oil prices act as a magnet to draw natural gas prices higher. That’s great news for natural gas producers like EnCana, XTO Energy, Apache, Devon Energy, and Canadian gas trusts. Many of these companies are soaring right now… which tells us the market agrees with the “higher natural gas price” thesis.

Good investing,

P.S. If you can’t tell yet, I’m as bullish on Canada as any region in the world. The bull market in oil could easily send my top Canada ideas up by hundreds of percent this year. You can learn more on the region’s best investment here.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over 5 million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Really, by 2025, the rest of the oil-producing world will simply lack the product to export. This will be due to reasons of depletion on a global scale, and fast-growing internal demand in oil-producing nations. Gasoline consumption in places as diverse as Russia, Iran, Venezuela and Saudi Arabia is just soaring, so there is less net oil available for export.

And oil output everywhere is flat or declining. (Just last month, Russia announced a plateau in oil output.) And closer to home, Mexico’s Cantarell field is simply crashing at an annual depletion rate of 8% or more.

So what will happen in 2025? Will the U.S. pump its own oil? No, it’s not there. Will the U.S. continue to import large volumes? No, it won’t be available. The bottom line is that conventional oil sources for the U.S. — domestic output and imports — are simply drying up.

Until next time,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!