Editor’s Note: Natural resources also continue to play a key role in fueling Asia’s economic development, and rising commodity prices also strengthen economic growth and development in resource-rich nations.

Oil prices serve as a barometer of economic growth because increased consumption in emerging markets goes hand in hand with economic expansion. It’s essential that global investors understand oil price movements.

The Silk Road Investor’s model Portfolio has exposure to one of the most promising Asian oil companies, and I remain bullish on oil’s long-term prospects.

Today we once again take a look at the latest on oil, through the lenses of energy expert Elliott H. Gue, editor of The Energy Strategist.

The End of Easy (and Cheap) Oil

By Elliott H. Gue

The end of easy oil has been a longstanding theme in this publication and remains arguably the most powerful driver in the sector, though the unprecedented drop-off in demand that occurred in the wake of the credit crisis and resultant economic dislocation has obscured this long-term trend. But with the global economy and credit markets now on the mend, this theme should come back with a vengeance over the next few quarters.

Supply concerns are at the heart of the end of easy oil. Non-OPEC oil production will, at best, remain steady in coming years; additional production from nonconventional sources, such as oil sands and deepwater, will offset declines from mature onshore and shallow-water fields.

In other words, production from easy and cheap-to-produce large onshore fields with less- complicated geology will be replaced with more expensive-to-produce offshore fields. That translates into rising marginal costs for crude oil production and elevated oil prices to incentivize undertake the massive investment needed to produce oil sands and deepwater projects.

In coming years, the amount of oil OPEC must produce to balance demand (the so-called “call”) will increase gradually as demand from developing countries rises and non-OPEC supply declines. OPEC countries have a number of planned projects slated for completion in the next seven years that should increase the organization’s production capacity. The bulk of this new capacity will come from Saudi Arabia. Of course, there remains a big question mark as to whether these planned expansions ultimately will increase capacity to the extent expected.

And even if production capacity does rise, the combination of flat-to-declining non-OPEC supply and rising demand will increase the call on OPEC to make up the difference. In short,

OPEC’s spare capacity–production capacity that can be ramped up quickly and maintained–will likely continue to drop gradually over the coming five to ten years.

The global credit crisis prompted a drop in demand for oil this year and corresponding cuts in OPEC output. In other words, the call on OPEC has fallen with oil demand, and OPEC’s production cuts have increased spare capacity. But nothing has really changed on the supply side; in fact, a severe decline in spending on drilling and exploration will ultimately hasten the fall in non-OPEC output. Even within OPEC, low oil prices late in 2008 and early this year have prompted the delay or outright cancellation of many projects. In other words, the increase in spare capacity is wholly a function of a short-term drop in demand; as demand returns, spare capacity will fall once again.

Recently the investment community has also been discussing the potential impact of a surge in production from new sources, such as deepwater fields in the Gulf of Mexico and Brazil. My view here is that these gigantic fields that are undoubtedly important finds for the companies involved.

But the media tends to overhype the total reserves of these fields, which feeds a common misconception that reserves of oil and production are somehow interchangeable. It’s important not to get drawn in to the seductive logic of this fallacy. What really matters is not how much oil is in the ground, but how quickly that oil can be produced without damaging the geology of the field.

For example, the massive Tiber oilfield discovered by BP in the deepwater Gulf of Mexico might ultimately generate an incremental 200,000 barrels of oil production per day by 2020. Although the media emphasized that the field contains billions of barrels of oil reserves, the reality is that at peak production capacity the field might account for around 0.25 percent of global oil consumption. But 200,000 barrels a day of incremental production 11 years from now just doesn’t sound as exciting as more than 3 billion barrels of oil in 65 million year-old rocks under the seafloor.

The long and short of this is that production from complex fields and unconventional sources will simply make up for declines in production from maturing fields outside OPEC. And even OPEC countries will have to spend unprecedented sums to bring smaller and more complex fields into production; increasing OPEC’s production capacity won’t be as easy as it was in the 1970s; the region’s huge, easy-to-produce fields, such as Saudi Arabia’s Ghawar, have matured and likely are already experiencing declining production.

Investors that would like to try and invest in this theme should look at two angles:

1. Oil services and equipment firms that have the advanced technologies required to produce more complex fields in regions such as the deepwater Gulf.
2. Oil producers with the capacity to increase oil production meaningfully in coming years.