Americans Forget High Oil Prices Too Quickly

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 |  Includes: BP, COP, CVX, XOM
by: Michael Fitzsimmons

For some years now I've been having an ongoing email debate with CNBC anchor Joe Kernen with respect to oil prices and oil supply and demand. Being a believer that worldwide supply will simply not keep up with worldwide demand, I have been a strong proponent of US energy diversification away from oil. Joe has strongly disagreed and said that the high price of oil was mere speculation. Back when oil topped $90/barrel and I told him it would go much much higher; he said poppycock and suggested that we should get two barrels of oil for $90.

Friday I got an email from Kernen declaring victory. Oil hit $45/barrel and that was his "two-for". He implied that "Einstein" (me) was wrong and that peak oil believers were badly mistaken. I wrote back and told him that after four years it was about time he was right on something, as even a clock is correct twice a day. Didn't get a reply to that one.

Kernen conveniently forgets some facts. First of all, I've always said we'd never see low prices on oil again unless we suffered a severe worldwide recession or depression. Hello. That said, even I am surprised by the precipitous drop in oil demand and prices. I never in my wildest dreams expected the extent of the current "financial crisis". More importantly though - the peak oil crowd was absolutely right. Oil was up 500% in a very few short years due to strong worldwide demand from emerging economies in China, India, Russia, and the Middle East. Even with oil prices at $145/barrel, worldwide oil supply never got much over 86 million barrels a day, and it took digging in the dirt (oil sands) to keep us at those numbers.

So, yes Joe, you were right on your two-for $90 call, but on the bigger picture you were wrong for so many years. In other words, oil prices have declined not because of new supply (or adoption of a sane energy policy), but due to huge demand destruction caused by the economic policies that Kernen and his fellow CNBC "goldilocks economists" have been supporting these many years.

Unfortunately, politicians, the media, and investors are making the same mistake as Joe. You would think the oil crisis that hit us this year (after all, it was only 6 months ago that oil was over $100 and gasoline over $4/gallon) would have taught even the Washington crowd something. However, in all the talk of auto bailouts there are some glaring omissions:

  1. The CEOs of GM and Ford (NYSE:F) should resign in return for bailout money. They have proven their incompetence over-and-over again with respect to fuel-efficient vehicles. Not to mention they came to Congress asking for $25 billion without so much as a plan or presentation? (I remember once giving a 2 hour PowerPoint slide presentation just to beg my bosses for $45,000 in engineering software!). If this isn't incompetence, what is?
  2. Chrysler should be allowed to fail. Cerberus, the privately held investment group which owns Chrysler, has lots of money - why doesn't it pony-up?? Private investors are now going to be bailed out with my tax-payer money? This is an abomination. Of course, the $700/billion going to Citi (NYSE:C), AIG, Bear...etc. etc. amounts to the same thing I suppose.
  3. Why aren't natural gas powered cars and trucks being discussed?
  4. Why doesn't Obama's "infrastructure stimulus plan" provide funds for building natural gas refueling stations along the interstate highway system?

The good news on this front is that the American driver has definitely gotten the message and won't be fooled again by lower short-term oil prices. Any car or truck that is not fuel efficient will have a shrinking pool of folks willing (able?) to shell out cash for them.

Despite an S&P 500 that is negative over the past 10 years (taking into account inflation and US dollar decline), Joe Kernen, the rest of the goldilocks economists on CNBC, and American policy makers still don't seem to "get it". Any country that imports 70% of its oil (can you spell U-S-A?) must adopt a strategic long-term comprehensive energy policy.

Low short-term oil and gasoline prices are obviously a direct threat to implementation of such a plan. However, now is exactly the time to begin filling the strategic petroleum reserve (SPR) to the brim and to enact a graduated gasoline tax ($0.02/gallon in 2009 increasing to $0.20/ gallon over 10 years) with this revenue going directly to fund alternatives to gasoline powered transportation (only).

The US economy has two broad problems: oil and the destruction of the middle class. I have already addressed oil with the energy policy. Equally disturbing for investors (not to mention he middle class itself) is that war has been declared on the middle class.

During the eight Clinton years (while, I might add, the fiscal budget was balanced), 23.7 million new jobs were created and median family income increased by $7,500. During the eight Bush years (while the fiscal deficit doubled from $5 trillion to over $10 trillion, and that was *before* the bailouts...), there were only 2.3 million new jobs created and median family income actually declined. During the Bush years, this income decline was felt even more severely as the value of the US dollar dropped while gasoline and inflation rose. Is it any wonder the S&P500 is down for the last 10 years? Given recent economic policies, are mutual fund management companies like Fidelity and Vanguard really so sure of their advertisements about investing for "the long term"? They certainly have a much harder case to make...

No country can be economically sound if the middle class is weak. History is a great predictor of what happens to countries when wealth is concentrated in the hands of a very few people. Yet, that's exactly what is happening in the US today with our unregulated financial markets and a tax-and-spend policy that favors multi-millionaires, billionaires, and the well-connected over the hard working middle class.

Some people have called me a socialist, or worse yet, a communist. I am certainly not a communist. However given a choice between say Canadian or Scandinavian style socialism or the "socialism for the wealthy" (fascism?) as implemented by the Bush crowd in the US, I would certainly favor the prior over the latter. That said, what we really need is fair government that implements capitalistic policies for the benefit of the many, not of the few. Only with a strong middle class will equity markets in the US be a place to invest for the long term. Otherwise, the destruction of wealth, investment, and the middle class will continue in the US, accompanied with a corresponding decline in everyone's standard of living.

If the US does not adopt a strategic long-term comprehensive energy policy, all of this will happen (and is happening now) regardless of any other economic policy whether it's socialist, capitalist, or fascist. Ironically, it is the most wealthy that have the most to lose. Americans, especially wealthy Americans, appear to be in as much denial about Bush political realities as they are about their addiction to foreign oil.

More accurately I suppose is their denial about the consequences of these realities. One only has to look at history to see how the wealthy fared in countries that dove into huge debt to back unwise militaristic policies. History shows economic decline is inevitably followed by a reduction in civil liberties as the government begins to exert more control in an effort to position itself for civil unrest. These reductions in civil liberties have already taken a huge leap forward under the current Bush administration.

The headline in the Economist last week asked "Where have all your savings gone?" The answer is "bye-bye," the same place where all our money goes for foreign oil. And if they don't get the auto bailout terms correct, we'll be sending all our money to Japan and Korea for purchasing fuel-efficient cars and trucks too. Of course that assumes we have a surviving middle class to purchase such vehicles. That appears to be a big "if". Now at least we have Obama up to bat as opposed to a continuation of the policies that got us here to begin with. We may have a fighting chance assuming he stays healthy. That said, he is the biggest threat to the fascist military industrial complex since Kennedy, and we know how that ended.

So what is an investor to do in these times? The lack of a US energy policy, combined with the withdrawal of investment dollars in the oil patch and alternative energy market due to the current economic crisis, means the next oil spike will be an even greater super-spike than this year's. Governments the world over are reducing interest rates and flooding the market with liquidity in hopes to jump start economies. Although banks are currently hoarding this cash, one of two things are going to happen:

  1. monetary and stimulus policy will succeed in bringing back the economy
  2. monetary and stimulus policy will fail and the recession is long and deep.

In case 1), you want to be invested in oil when the demand comes back. COP, XOM, BP, and CVX are all large, well capitalized oil companies that pay good dividends and are in great financial shape. In case 2) you want to be in cash with some gold in case things really get bad. Stick with gold coins and take personal delivery of them. That is, if you can even find them! Kitco and AMPEX still seem to be having problems finding US gold eagle coins to sell. See my earlier SA article on this issue.