Sell Your Oil Shares

I just got back from Houston on the book tour, and managed to get in some private conversations with oilmen I know from the Caspian. As we've been discussing over the last week or so, the private talk within the industry is that short of an evolutionary shift in business plan the oil majors as we know them are done for.

Oilmen know that, short of an innovation of the magnitude of the invention of the transistor, Big Oil has little growth ahead of it in the next five years, and no growth – and probably absolute shrinkage – over the next decade and beyond.

The reason is that the oil majors can't maintain the foundation of their value – how much oil and natural gas they possess in total, or their so-called booked reserves. State-owned oil companies in Russia, Iran, Saudi Arabia, Venezuela and elsewhere control between 80% and 90% of the world's oil reserves, leaving the oil majors the remainder, and that is a slender reed indeed. Some of the majors may actually replenish their reserves for the short term, or even in some individual years beyond that. But they can't do so over the long term.

So why are oil shares largely buoyant this year? Because Wall Street hasn't yet seemed to absorb the fact that the current explosion in oil company profits is smoke – a deception. It's not company growth, but the oil price bubble. But it will figure it out.

And that's why, for those who own shares of the big integrated oil companies, it seems best in my opinion to pocket one's profit from the price run-up. Oh, there's some time, some more profit to be eked out because of the price bubble, now heading to break the inflation-adjusted 1980 record of $101 or so, depending who is doing the calculations.

But look for the smart money to start migrating elsewhere. If one wished to stay in oil, for instance, one could go for where the real, long-term growth will come – in the service companies like FMC, Schlumberger or Halliburton, or pure drilling plays.

These companies are going to be used more and more as a replacement for Exxon, Chevron, BP, ConocoPhillips, Shell, Total -- the states will identify the fields to be developed, and simply hire the service companies as contractors to bring them to market. It is they who will pocket the big margins, and not Big Oil.

The oil companies are innovators, so there is always the chance that one or more of them will discover some new way of making cars move, cities light up and factories work. But short of that, they are dinosaurs.