Recent gains in the price of oil – $57 in early November 2017 – has renewed investor interest in Canadian oil companies. That also reflects profit opportunities for long-term investors.

You can profit nicely over long periods by investing a reasonable portion of your portfolio in well-established or well-managed Canadian oil companies, especially those with high-quality reserves and rising production. These companies are well-positioned to profit during periods of high oil prices, and are able to at least partly offset price declines by producing more oil.

We continue to advise against overindulging in Canadian oil stocks. That’s because the Resource sector (including oil) is highly volatile, and no one can accurately predict future oil prices.

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Canadian oil companies and “peak oil”

“Peak oil” is the idea that world oil production will eventually reach a maximum rate, then go into a terminal decline. Studying past oil production is supposed to make it possible to predict the date when we’ll hit that maximum rate.

This idea started to come up as early as 1919, when a U.S. government geologist wrote that the U.S. could reach its maximum oil production within as little as three years. In the early 1950s, geologists at multinational oil companies began to think U.S. oil output could peak by 1960, and world output by 1985.

Of course, multinational oil companies have always had good business reasons to predict that the world was running out of oil. It helped support their argument for more favourable tax treatment from governments, to leave more money for exploration.

Peak oil theory gained stature in the final decades of the 20th century, particularly when oil prices were on the rise. However, each revision of the theory pushed the coming peak in oil prices a few years further into the future.

You don’t hear much about peak oil theory anymore. People seem to have accepted the obvious idea that past oil production has little to do with future supply. That’s because production methods and targets have changed. We no longer need to look for those rare pools of “liquid” oil that sparked the boom in oil use more than a century ago. Now, thanks to modern technology, we can extract oil from shale and other types of rock that are plentiful in many parts of the world.

No one knows what the price of oil will be in the next 10 years. That depends on a lot of volatile factors, including political and environmental opposition. We do know that, thanks to technology, a lot more oil is available for production than in the past. Better yet, these new oil sources are spread around the globe.

This is sure to lead to far more stability in oil supplies. Prices will remain volatile, but we’ll be able to take oil availability for granted, just as we do with most commodities. We see this as a big long-term plus for the world economy and stock market.

Investing in Canadian oil companies

Oil optimists assume that demand for oil will keep on growing indefinitely, as more people around the world buy cars. Oil supply can also keep on expanding indefinitely, however, thanks to technological advances that have opened up vast new oil reserves in shale deposits around the world. Environmental regulations make it difficult to tap into these deposits in some areas, of course. Meanwhile, political turmoil in the Mideast and Venezuela make future supplies of conventional oil more erratic and uncertain.

Politics, weather and market sentiment will determine whether oil users stock up on oil, or cut down on new buying while they use up existing inventory. This can have a big impact on oil-price trends.

Investors refer to buying at a time like this as “trying to catch the bottom”. Another way to think of it is “trying to catch a falling knife”. Oil has indeed come down a long way from its peak, but even though it has rebounded somewhat from its bottom, it could drop further again. When it hits bottom, it may turn around and shoot back up again, as it has a number of times in the past. Or it may instead go sideways for months or years.

No matter how intently you read the news on Canadian oil companies, you won’t gain any worthwhile advantage. You have too much competition. This market is simply too big and too widely traded for anybody to figure it out.

Do you think we will run out of oil in your lifetime…your children’s lifetime…your grandchildren’s…?

This post was originally published in 2017 and is regularly updated.