Expect Oil to Approach $100/bbl Again By Summer 26 comments
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Inflation has been trickling back in, and the price of oil has rocketed recently. With crude closing just above $54/gallon, I foresee a repeat of what happened last summer, except this time I don’t think deflationary forces will cause crude to come down crashing and prevent the idiotic political forces from Washington into pushing us into a full-fledged energy crisis.
Congress has made it clear any company that makes exorbitant profits is at risk. Oil companies, in particular, are on close watch. Most of the talk last year about a windfall profits tax was once oil crept over $110/barrel and the price of gas was $3 or more at the pump.
With the Fed’s printing press going full blast and the continued decline in the dollar, no offshore drilling ban premanently removed, and other factors, we can expect oil to creep back up to $100 by the summer again. I think this will mainly be an inflationary event caused by the expanded money supply, but natural supply/demand will play a part as well. Nonetheless, whatever the reason is, once oil creeps above $80-$90 a barrel, Congress will officially begin its oil company witch hunt again.
Of all the dumb populist measures, the windfall profits tax is the most easy one to pass. Take money away from evil oil companies, invest it in happy renewable energy and tax cuts for the middle class, of course it will pass! I can just see Obama saying “The stock price of XYZ Oil has doubled in the past month…yet the unemployment rate is about 10% It’s time XYZ Oil gives back some of its profits and invests in the future of our country.”
At first, the tax won’t have much effect, since whatever the firms are producing, they’ll continue to produce. Windfall profits taxes don’t so much affect current production but discourage investment. The tax will pretty much kill any investment in the US in fossil fuels, whether its oil or natural gas, so we’ll have less domestic supply, higher energy prices, and become more reliant on foreign countries.
More foreign imports, less domestic production, more of a trade deficit, less domestic jobs, more money printing to take care of that, more inflation, and before we know it, gas at the pump is $8/gallon, gold is $2000 an ounce or more, and life is just miserable. The stagflation scenario that the gold bug uber bears talk about comes into effect through an energy crisis, much like our financial crisis began as a subprime issue. I expect Peter Schiff will begin his worldwide “I told you so” tour sometime in early 2011.
On that note, have a nice weekend everyone!
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This article has 26 comments:
> jack
Kind of like housing. Overhot, now undershooting. Don't tell me $50/sq ft for a nice home isn't the bottom. You can't even build the same house for that.
Everything goes back to the normal trend line eventually...
Never thought I'd like European producers more than American- but our "new world order" of Marxism seasoned with unprecedented deficit spending and debt monetization would even prohibit us from entering the EU.
The longer term problem is made more complex by the curtailment of investment in oil infrastructure. The cuts in exploration and development budgets have been legion. That does potentially set the stage for price shocks down the road: but only after OPEC's excess production capacity is absorbed. How long that takes will depend a lot on the macro economic environment and I leave that to others to guess at. In the meantime, I expect oil prices will be highly volatile; I wouldn't be counting on prices north of $100 anytime soon (unless the US dollar collapses - in which case, again, the price increase will feed into demand destruction in the largest oil consuming nation).
As a long term investment, well capitalized oil producers and the major integrated companies are likely a safe bet. Smaller exploration and development companies, in this environment (where access to capital is difficult and the ability to survive the price volatility - see the example of Oilexco (TSE listed)). Some articles published on Seeking Alpha have suggested that, as a hedge against the possible (likely?) devaluation of the US dollar, US investors look to acquire inter-listed Canadian (or other foreign) oil companies. An interesting angle - playing for higher oil prices, plus something of a currency hedge.
(Long CNQ, some Canroys, Talisman).
As a long term investment, well capitalized oil producers and the major integrated companies are likely a safe bet. Smaller exploration and development companies, in this environment (where access to capital is difficult and the ability to survive the price volatility - see the example of Oilexco (TSE listed)) ARE A RISKY BET. Some articles published on Seeking Alpha have suggested that, as a hedge against the possible (likely?) devaluation of the US dollar, US investors look to acquire inter-listed Canadian (or other foreign) oil companies. An interesting angle - playing for higher oil prices, plus something of a currency hedge.
It won't be long before empty Oil Tankers are being pirated for their cargo's of Gold Bullion.
On Mar 27 01:04 PM Ferdinand E. Banks wrote:
> Hi Michael. Here it is on a friday in Uppsala, and after a day of
> telling doctoral students that I am the best economics teacher in
> the world - which may or may not be true - I feel it my duty to inform
> you that I am the leading academic energy economist in the world,
> which is very definitely the case.
>
> About this $100/b figure that you want us to accept. I say forget
> about it...for the time being that is. Despite what you have or will
> hear about low oil prices from those groovy folks at OPEC's headquarters
> in Vienna, I think that they are pretty satisfied with the way things
> are going, although if the dollar crashes they might lose their cool.
>
>
> "Congress will officially begin its oil company witch hunt again",
> you say. AGAIN you say. Well mercy me. I encounter people from Big
> Oil at the conferences now and then. Except for the fact that their
> knowledge of Econ 101 is deficient - to put it mildly - they also
> seem pretty satisfied damned satisfied.Unless I am mistaken they
> and their OPEC colleagues will remain that way for a long time..
We are in a world wide financial crisis now. A similar situation has been unfolding despite the recent increase in prices. Production exceeds consumption. No matter how debased the dollar is, oil can't rise very much in a market with a lot of excess capacity. I think the current run up in oil prices is not sustainable. Oil in the middle eastern countries costs less than $5 a barrel to produce. Even at $12 a barrel, they would still make a profit.
Though I don't think it will go that low this time, I think we'll see $30 a barrel before we see $150 again. The only disclaimer I'll add to my prediction is that it assumes no supply disruption occurs. If Israel nukes Iran, then $300 a barrel would be my guess.
On Mar 28 03:57 PM Dave Wrixon wrote:
> Don't worry, they will soon change their tune when they wake up to
> the fact they have been passed off a lot of worthless IOUs.
>
> It won't be long before empty Oil Tankers are being pirated for their
> cargo's of Gold Bullion.
The reason Oil dropped from 140+ highs was because the market( everyone else) couldn't afford such a rediculous price. It was driven up there by those who have no idea of the costs involved in the myriad processes to which oil is used,not just gasoline.
When we get there remember that tax payers making under 250K will not see ONE DIME of tax increases. HaHaHaHa, Yes he can and yes he will.
Hilarious....
On Mar 27 10:55 PM MADE IN SOMALIA wrote:
> If Oil will be 100$ by the summer, you will fly to the moon like
> baloon.
> I always enjoy looking at folks, who are long some stocks, lose 50-90%
> and then write about investing in Palladium futures, leveraged Crude
> Oil ETF's or Propane OTC trading, when in fact, such guru's even
> being right, will never make even 1 penny out of it, because they
> afraid to invest in anything, that is beyond CNBC or MadMarketCramer
> junk.
> If you think Oil is 100$, then buy it, don't preach it.
In the future, yes, the inflation that will come with the trillion dollar stimulus package will see to that.
The people that run this world want to ruin certain oil rich countries. Most of these countries base their budget on 70.00 per barrel. Right now they are hurting at 50.00.
Send me a bet