I just returned from the annual pacesetter conference in Greenwich, Connecticut where I listened for three days to well known experts from around the world speak on the energy industry and all the issues affecting it.

It was a fascinating array of energy industry insiders, Wall Street analysts, and geo-political experts all giving great information, insights, and predictions on energy. The recurring theme of it all was that going forward energy supplies will have a hard time meeting demand for two main reasons. 1) there are many mature fields especially in non OPEC countries that have or will shortly meet their peak and begin overall production declines. Many fields that we have relied on for major supplies have seen better days. The low hanging fruit is gone and what’s left will get more and more expensive to find and refine. 2) Chindia (China & India) are sucking up the excess capacity in the markets as fast as it can be delivered and show no signs of slowing down. They are both major net importers of energy and this affects the markets significantly. These two factors, lack of supply and growing demand, are moving on a collision course with each other. Something will have to give... and it will likely be the price of energy.

Reduction in R&D:
While most groups in the energy industry throughout the process have recently enjoyed unprecedented success and huge profits, there was definitely an undercurrent of concern throughout the conference. Upstream costs are rising at a more rapid pace than revenues and margins are thinning every quarter. The decline in margins is expected to continue until at least 2008. In addition Wall Street, being averse to risk, is discouraging any risky exploration. This has caused exploration spending to decline and is directing drilling away from new field exploration and towards known reserves. This can be very problematic moving forward as demand continues to increase and reserves continue to decline.

Brain Drain:
Another area of concern is the lack of trained professionals in the industry. The industry lost a generation of engineers and geologists in the later part of last century and now the industry and educational system are trying to catch up. Even if new major fields are found this lack of professional personnel will be another factor preventing any major capacity increases.

Big Brother's Fist:
Finally governments around the globe, including the US and Canada, are threatening the industry in a variety of ways. Canada has already dramatically affected the markets of their publicly traded energy trusts with unprecedented new taxes - and threaten to stifle development of their vast oil sands with overreaching taxation. The US politicians have many proposals being aired ranging from more taxes at the pump to “excessive” profit taxes on the oil companies themselves. With margins tightening and more unfriendly politicians coming to power this could be very bad for the energy markets and negatively affect the industry in a many ways.

And the Bull Roars:
In the end many professional at the conference concluded pricing should continue to fluctuate in the short term and may be most dramatically affected by geo-political events. However, in the long term the limits on capacity will hinder supplies. As demand increases, pricing will have to rise; therefore, the best place to be from an investment standpoint is to own long term reserves.