$100 Oil

[powayseller]

I am amazed that the majority of people do not believe that we are running out of cheap oil. The Coming Ecnomic Collapse by Dr. Stephen Leeb makes the point that we are facing the biggest economic crisis of our civilization, one which cannot be solved with printing money or reducing interest rates. He predicts $200 oil.

But which economists or investors share his view? Wall Street, the government, and the media is in denial, just as they were in denial about the stock market and housing bubbles.

Cheap Oil: How much longer can we go on like this?

Running out of oil versus running out of cheap oil.

What will happen to our economy as oil keeps rising, and are you positioned to profit? Did you know that COP sells at under 10 times earnings? Zeal has an interesting article about oil this month, Real Oil Highs

They make it clear that oil has been in an uptrend for months, predating the Israel-Hezbollah conflict. The media reports that oil is high due to Middle East uncertainty is plain false. Oil was at $75/barrel before this conflict ever started, and went up 2.7% since, the same amount is has been going up anyway over the last few months.

How anybody believes oil will not go to $100/barrel in the next year is beyond me. I am very interested in knowing which data supports cheap oil.

[SD Realtor]

PS –

I am of the if you can’t beat em join em… To me the question is not whether oil will go to 100 bucks a barrel. The question to me is:

How can I make money off of the upcoming scenario…

[powayseller]

Yes, that’s the point. Read Zeal, because they have lots of ideas, but you have to subscribe to get the stock tips. I posted Leeb’s recommendations a few days ago.

[rseiser]

I am not so sure that oil will go over $100 by next year or to $200 in the next 10 years, both of which would indeed beat inflation by far. Oil has had a fantastic run, and lots of things are happening already: Slowing US economy, slowing world economy, slowing construction, people buying smaller cars, alternatives coming along, people starting renting and commute less, recycling. Also, there are some products that will be switched to the less energy/oil intensive form, including insulation or air-conditioning heat-sinks in the ground, heat-pumps. Also, moves to natural gas, LNG, tar-sands. Yes, I know the current path looks like unsustainable and cannot be changed in a few years. But so are the supplies, we are not running out of them either that soon. While I don’t dispute peak oil (if it turns down, there is a peak, I guess), there are still a lot of resources. They talk about unconventional reserves being 100x larger than conventional ones, and some of that might be feasible. I mean, look at the tar-sands costing $25. It is not so much different earning $75 or only $50. And natural gas is still 30% cheaper than oil on average. If global warming gets serious, nobody will be allowed to burn excess oil, that will dampen the price.
I don’t have a crystal ball, but you see that there are so many aspects, short-term and long-term, and I just wouldn’t bet too strongly on a commodity that has risen that much over the last years, in the face of a slowing construction and economy (and over-consumption).

[qcomer]

PS,

Actually, oil was running at around $72 per barrel before mid east crisis began. It had touched $75 in April because of lots of geo political tensions had already been priced into that. Iran’s nuclear program, unrest in Nigeria, Venezuela putting oil fields under state rule, Iraq war going on and on, China’s growing oil demand, etc.

We both agree on housing slowing down and taking US consumer with it, right? How will it effect China until either Japan or China itself can create a consumer base able to replace the whopping US consumer? Why would you bet on oil and commodities with an impeding recession? China is suffering badly with huge pollution issues in main cities due to its inefficient use of oil and natural resources. As per the Chinese minister, China is going to increase energy efficiency by 4% this year increasing to much bigger %age in 5 years. note that with the huge pollution problems, China is facing, this is utmost priority for Chinese government and they can afford to sacrifice bit of growth for that. Also, when oil becomes expensive then after a certain threshold demand starts to drop. Even more siginificant is that this deman may not return as people will not remove insulation from their houses or sell their hybrid cars or remove solar panels from roof tops. So extremely high oil prices are dangerous for OPEC as they may drive the consumer to alternative energy sources and they may not return even when price has come down. So that covers the demand side of the argument.

Now to the supply of cheap oil. I have no idea about the rest of the geo-political issues but they can come up or get resolved as quickly and have been mainly affecting oil supplies. OPEC predicts to increase oil supplies from 4.2million to 6.1million by 2010. Important part of the supply side argument is about the time frame you are looking at. What is the time frame do you see oil hitting 100, 200, 300 per barrel?

BTW, I like COP, VLO as well as they are dividend paying companies that have some growth potential too. Do you plan to play the oil sector by investing in COP? Why not buy oil tracking ETFs if you are sure it will hit $100 since the upside is sweeter (COP stock may not hit $100 even if oil hits $100)?

[powayseller]

OPEC doesn’t like the high prices, I am sure. But if we are at peak supply of cheap oil, that explains why the price cannot be lowered. Zeal made a case, in the link above, that the high price is independent of geopolitical uncertainty, since oil has been rising since 2004? See Zeal graph.

So you all think that in a recession, oil demand weakens and prices drop back to $50/barrel? How can people cut back on oil use? Are they going to stop driving to work? How much price reduction can you get from conservation?

[North County Jim]

How can people cut back on oil use? Are they going to stop driving to work?

With the severe recession you are predicting, won’t there be fewer people driving to work?

Leaving that aside, people who are hurt by high oil and gas prices will find ways to reduce consumption. Some will trade in existing vehicles for more fuel-efficient cars. Others will reduce trips. You’ll see more people looking for car pools.

Most analysts attribute this spike in prices to an increase in demand as opposed to supply-driven spikes of the past.

By themselves, high prices serve to reduce demand. Throw in a recession and demand can be reduced pretty significantly.

[speedingpullet]

The problem isn’t so much the supply of cheap oil, its the refining process that has reached a deadlock. No one acutally knows how much oil is left, but at the moment the refining industry is working flat-out. No one appears to be investing in new refineries or improved oil technology at the moment.

Which means that, no matter how much of it is left in the ground, until the oil can be processed into gas, aviation fuel etc…we will have a percieved ‘shortage’.

I know almost nothing about the stock market, but it would seem that refined oil products, as opposed to Crude, will go up due to limited supply. Just my 2 cents worth..

[rseiser]

Yes, refining is a problem and a bottleneck at times that can drive up prices, but it doesn’t tell the whole story. At least not yet. Crude oil costs about $75/42=$1.8 / gallon. If you add transportation, taxes, gas-stations, credit-card fees, you are already at about $2.50, so refining costs about $0.70. Also, recently most of the refining is done in the Middle East and even in Europe to make up for our shortage in refineries. Yes, we could earn more, and we currently give away some profit, which is stupid, but it’s not the only problem. Higher crude prices have their validity, and some it is justified simply by inflation.

[OwnerOfCalifornia]

I had previously recommended A Thousand Barrels a Second as an excellent and insigtful single book to read in order to get a grasp on what is happening in the world of oil. In it, the author develops an ‘oil intensity’ index defined as the amount of increased oil consumpsion needed to grow national GDP. A value of 100 corresponds to a 1% increase in oil consumption to grow GDP by 1%. To cite a few examples off the top of my head (don’t have the book with me but I’ll confirm tonight):

USA = 40
China = 90
South Korea = 15 (was 90 until the Asian financial crisis of 1997-98)
Japan = 0

These numbers are suprisingly stable over intermediate timeframes (20-30 years) but show dramatic inflections over the course of 3-5 years. The US index was 90 until the mid 70’s – 80’s when we obsoleted oil-fired electrical generation, but we still must consume more to grow the economy. Interestingly, Japan and some European contries use no more oil today than they used in the 1970’s, so if we were to live like they do (highly utilized mass transit, very dense living), we could stop growing our oil consumption, but could we actually decrease it? I have my doubts.

Refinery capacity is definitely a problem, but if I have oil and no refineries capable of buying it, why should I expect the price of my oil to rise?

As much as I would love alternative energy sources to really take flight, there are no silver-bullet solutions to high oil prices. There is no technology today that can cheaply or easily replace our massive fossil fuel energy infastructure. There is a reason many alternatives have been on the table for 30 years or longer but remain undeveloped.

Canadian tar sands and even the Green River oil shale deposits in Colorado and Wyoming will help very little, if not make matters worse. The essence of the problem is production rate, not total reserves. Even though there is still over 1 trillion barrels of conventional and unconventional reserves, we probably cannot produce them quickly enough to meet forecasted demand. Tar sands production is a terribly slow, tremedously energy intensive process that requires large amounts of scarce fresh water and natural gas. The wasting of these resources to upgrade extremely low grade oil into marketable oil has caused Matt Simmons to remark that the process is akin to “turning gold into lead”.

I think I’m rambling at this point, so I’ll stop. I’ll say it again, I see very little long-term downside risk to the price of light-sweet crude oil.

[powayseller]

I ordered the book after you recommended it, and it arrived today.

[anxvariety]

Won’t they keep raising prices until demand peters out? Then the cartels know they have a ‘market’ price.

Funny how most people feel as though they are being unfairly treated or as if emotion is going to change the prices… too bad they slept through economics. When I hear people complaining to gas station clerks, it scares me.. not sure why, I guess the level of ignorance or wondering what drugs theyre on?

[lewman]

I agree with the peak oil arguments and would not be surprised if we see $100 oil in my life time. But knowing (or thinking you know) the long term direction of oil is one thing but turning that into profits is another because it won’t go up in a straight line.

If you look at the chart, oil’s been up with no meaningful interruption for several years now and probabilities are starting to favor a sizable correction even if the long term trend is up. Remember oil prices dropped like a rock in 2001 so if the current rounds of rate hike does eventually trigger a recession (or merely a fear of such), traders could use it as an excuse to drive oil prices way down.

For those of you who are zeal subscribers (I think there may be a few here), check out the gold/oil ratio chart dating back to the early 70s. At present, the ratio touched an all time low of 4 in mid-2005 then gold’s run up since last year push it back to around 8 now. And more importantly, there had only been a few instances during these 30 years where the ratio drops below 10 and usually it doesn’t stay that low for long before a significant rebound takes it back up. If you believe in mean reversion, then either gold is too cheap compared to oil or oil is too expensive compared to gold. That of course doesn’t mean that over the next year or so oil could not just hover around 60~70s while gold rises to catch up, but as I said before, I would not rule out the possibility that oil will be beaten down signficantly from these levels before it marches on once again to reach the moon.

Even though I’m a commodity bull, I’m preparing for it … at least psychologically for now.

Lewis

[carlislematthew]

But which economists or investors share his view? Wall Street, the government, and the media is in denial, just as they were in denial about the stock market and housing bubbles.

One of the reasons that a lot of people ignore the “we’re running out of oil!” predictions is that they’ve been going on for about 100 years. I read in the Economist one time that this is (approx) the 6th time we’ve been “running out of oil”.

The Economist said that the problem isn’t a lack of oil, but where the oil is that’s the problem. So much of it is in the middle-east and it’s concentrated there. Certainly an issue, geo-politically, as we’re seeing right now.

We’ll never “run out of oil”. It will simply get expensive enough over time (with spikes and troughs) that alternatives will be demanded and will be commercially viable. Right now, the price is high enough for people like Toyota to truly innovate with their hybrid engines. 10 years ago that would have been stupid as Americans would have laughed at these silly little cars while pumping $1/gallon gasoline.

If oil/gas gets expensive enough (whatever that turns out to be) Americans will get over their issues with “nukular” power and start buying plug-in hybrids with all the fancy new battery technology we’ll be inventing over the coming years.

[powayseller]

The post I made is about the end of cheap oil. Very important difference. What will $100 or $125/barrel oil do to our economy? It will take a decade to provide enough alternative cars and nuclear power plants to reduce our demand for oil. Demand keeps rising, as China wants to have everthing we have.
Your statement that it’s been said for 10 years doesn’t hold weight either – some economists have been talking about the housing bubble popping for 5 years and they were wrong too, until it happened. I appreciate your response. Well, what do you think about the impact of the END of CHEAP OIL?

[Author]

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