Oil Above $60/Barrel: Still Cheaper than a Cup of Coffee

Crude oil prices are once again above $60 a barrel and local television newscasts have returned to that old chestnut, consumers grousing about the high cost of gasoline, to fill airtime. Never mind the fact that despite the great lengths we go to extract, transport and refine it, ounce-for-ounce petrol is still far cheaper than a cup of coffee or bottled water.

It’s curious that the gains in oil (which is up approximately 75 percent from its lows) and gasoline (up more than 50 percent) have occurred amid the greatest oversupply in a generation.

The financial crisis and subsequent economic contraction has pushed peak oil—the point at which the world is unable to increase oil production—from the public’s psyche. But it will not meaningfully delay the inevitable decline in output.

Peak oil will only be clearly recognized with the benefit of hindsight. Yet a good case can be make that we’ve already past that inflection point. Our guess is that energy prices will temporarily retreat in the near term as a full economy recovery is still a ways off and investors get nervous after the big run they’ve had in recent months. Energy stocks are bound to take a hit on any such correction before heading higher.

One company that has remained largely unscathed from an earnings standpoint, and will continue to thrive come what may, is Transocean (RIG). The stock should play a prominent role in everyone’s portfolio. And we consider it a long-term buy here, even though it, too, is vulnerable to a near-term setback.

The company operates the world’s largest fleet of offshore rigs and drillships, with a particular emphasis on ultra deepwater drilling. While land-based rigs are getting knocked down these days like ten pins on league night at the bowling alley (off 55 percent since last August according to Baker Hughes), the economics of deepwater offshore drilling is such that work continues apace.

Transocean has not only the most technologically advanced fleet of rigs; it’s also more than twice the size of its nearest rival. The company holds 19 of the past 23 world records for drilling in the deepest waters. That technological edge, plus its outstanding track record of service in harsh environments, means it can command premium rental rates on those rigs. Transocean’s unique position in deepwater drilling makes it more resilient to the drop in energy prices as its rigs continue to command higher dayrates. As demand for deepwater rigs, despite lower oil prices, continues to exceed supply, rental rates for deepwater drilling rigs continue to surge.

That said, an offshore rig is a huge investment, and with demand and day rates in question, rig builders won’t take a chance on building more. The global credit crunch is also a factor that will result in a stronger competitive position for a major operator such as Transocean. The lack of credit is squeezing its smaller rivals from the business, preventing them from building new vessels. As many as one-fifth of the new deepwater rigs on order in shipyards all across the world were canceled or delayed because of capital constraints.

As a result, there’s already a scramble for the relatively few offshore rigs available, particularly for deepwater capable rigs that have a water depth capacity of at least 4,500 feet. Future demand for these rigs should continue rise to benefit from successful drilling efforts in the Gulf of Mexico, offshore Brazil and other parts of the world. Soaring day rates in this leveraged business should translate into tremendous profit gains for Transocean.

The company itself believes that deepwater rates should continue to remain strong, as demand will exceed supply in foreseeable future. Yet the stock is trading at less than 5 times the consensus estimate for the company’s 2010 profits—an estimate we think is fairly conservative. With long-term annual profit gains expected to top 15 percent, you’ll be hard pressed to find a cheaper stock and certainly not one that serves such a vital role in our society.

Comments

[logicalthought:]

>>ounce-for-ounce petrol is still far cheaper than a cup of coffee or bottled water...<<

These kind of comparisons are idiotic. How about this one:

A one-liter bottle of water will sustain a person for 24 hours while one-liter of gasoline (at highway speeds) will sustain your car for seven minutes. Therefore, gasoline should cost approximately 1/206th as much as bottled water.

Sorry, but the irrelevancy of the "gas price relative to whatever" metaphor really detracts from whatever else the user of such a cliche wants to say.

May 21 07:41 AM

[Albert Meyer:]

...but you can drive further in 7 minutes than you can walk in 24 hours... :-)

May 21 08:39 AM

[ArtfulDodger:]

Excellent reasoning, logicalthought. Thank you for pointing the "false comparison" out.

The rest of Leeb's article, however, is well-written and reasonably reasoned.


On May 21 07:41 AM logicalthought wrote:

> >>ounce-for-ounce petrol is still far cheaper than a cup of coffee
> or bottled water...<<
>
> These kind of comparisons are idiotic. How about this one:
>
> A one-liter bottle of water will sustain a person for 24 hours while
> one-liter of gasoline (at highway speeds) will sustain your car for
> seven minutes. Therefore, gasoline should cost approximately 1/206th
> as much as bottled water.
>
> Sorry, but the irrelevancy of the "gas price relative to whatever"
> metaphor really detracts from whatever else the user of such a cliche
> wants to say.

May 21 08:47 AM

[logicalthought:]

lol... Actually, not. I could certainly walk 14 hours out of 24 at three miles per hour (totaling 42 miles), whereas driving at 60 mph for seven minutes will only get me seven miles. Even though I would probably consume four liters of water to walk those 42 miles, I'd still get 10.5 miles per liter of water vs. around 7 miles per liter of gas for the car. Am "I" air-conditioned and do "I" come with power seats and a defroster? Of course not, but the meaninglessness of this comparison is exactly my point!


On May 21 08:39 AM Albert Meyer wrote:

> ...but you can drive further in 7 minutes than you can walk in 24
> hours... :-)

May 21 09:01 AM

[logicalthought:]

Please forgive my obsession here, but to take this one step further: both water and gasoline are a hell of a lot more useful than gold, but the last time I checked, an ounce of gold was a wee bit pricier than an ounce of either one of them... Does that mean that an ounce (by weight) of gasoline should be exchangeable for, say, 10 ounces of gold?

May 21 09:13 AM

[Maxe Paul:]

Ok folks try riding a pushbike!................ though you will need a small amount of oil for the chain!!!

May 21 09:17 AM

[jaffee:]

GoSooners,

his article is well written, and he makes very logical and intelligent arguments. why destroy the debate with your silly comments? if you disagree with his article state your reasons why.

jaffee

May 21 10:42 AM

[Larry House:]

We have yet to see what kind of tax burden Obama wants to put on oil companies, but I bet it is a duzy. I do think RIG and other oil names are a good investment anyway.

May 21 02:12 PM

[SageNot:]

Stephen my man, still talking (& writing) your book? The world w/b drinking water far longer than consuming gasoline, but I've mentioned this to you before, now you're here preaching the same trivia. Until they find the substitute for water, what point are you trying to make in this article & many more just like it?

Are you ever going to get into the most natural replacement for crude oil, or keep on preaching "Peak Oil?" If France can supply nearly 80% of it's energy needs with uranium, why not us for heaven's sake? You spend so little of your time avoiding uranium, why is that?

Say Hi to the Missus.

SageNot

May 21 05:54 PM

[samadams:]

So substitute water for coffee, Pepsi, juice, Gatorade, or whatever. His point is gas is cheap (in America at least). For about 17 cents a cup you can power a motorized vehicle for 6-9 miles. That's a good deal anyway you slice it. Try hiring someone to take you that distance in a horse and buggy or bicycle for 17 cents.

May 21 08:20 PM

[logicalthought:]

So what if oil is"cheap" relative to non-fuel substances? What is the relevance of that? Air is a hell of a lot more necessary than oil and air is FREE, so maybe the oil companies should pay *us* to take the oil! Look, there's obviously a hell of a lot more oil out there then demand right now, or the oil wouldn't be backing up in the tankers. These peak oil nuts who think it's going to (and staying at) $150+/barrel are dreaming (unless, of course, it gets there because Geithner, Bernacke & crew succeed in destroying the dollar); if the increased supply that magically appears at those prices doesn't drive the price right back down, then drastically reduced demand via substitution of natural gas or electric-powered vehicles will. The free market (yes, reasonably regulated) is a wonderful thing (not that anyone in the federal government seems to believe that any more).

On May 21 08:20 PM samadams wrote:

> So substitute water for coffee, Pepsi, juice, Gatorade, or whatever.
> His point is gas is cheap (in America at least). For about 17 cents
> a cup you can power a motorized vehicle for 6-9 miles. That's
> a good deal anyway you slice it. Try hiring someone to take you
> that distance in a horse and buggy or bicycle for 17 cents.

May 21 09:20 PM

[samadams:]

OK 4 posts already logical thought. You made your point and now you're beating a dead horse. Anyone else have any thoughts.

May 21 09:30 PM

[LKofScotland:]

coffee powers me but not my tractor trailer.

May 21 09:39 PM

[chopshop:]

Talk about why oil should cost more is one reason talk abounds about the end of capitolism. To some extend a society should take care and show respect for the average worker, even capitolism. When capitolism forgets to allow the average worker a good day and the opporunty to hold thier heads up and take care of themselves in a decent mannor then talk will come about that societies lack of merrits.
It sickens and demoralizes that average American to see investors root for and even manipulate the markets to profit a few at the cost of them and many have seen this now. Don't be surprised when the average person does without and does not feel the need to restimulate the economy.

May 21 10:40 PM

[ArtfulDodger:]

You are right, Larry House. From what I hear, O wants to force us into tiny autos, then tax us by the mile for driving older, larger cars.

It's going to be fun trying to get into cars that many of us should be wearing instead of driving.


On May 21 02:12 PM Larry House wrote:

> We have yet to see what kind of tax burden Obama wants to put on
> oil companies, but I bet it is a duzy. I do think RIG and other oil
> names are a good investment anyway.

May 22 02:27 AM

[enviro111:]

His point about oil being cheaper than a cup of coffee wasn't to debate the merits of the two products but to show how really, really cheap oil currently is.

All these so called experts claim that oil is expensive at $60/bbl or $100/bbl or $150/bbl, but when you ask them if they can define what a 'barrel' is ...

you get --- uh-huh-duh ... "well it's like ..." "I don't know"

If you can't define the basis for the price, how do you know if it is expensive?

Most people know what a cup is and comparing the price of oil with other common liquids (i.e., water) is useful. The implication is that since oil is the backbone of our civilization, less plentiful and non renewable, it should cost more than water.

Regarding Transocean - RIG

It is a solid company that is selling at a fair price. It is not an oil company but a high tech oil services company so it might not be put through the Obama wringer like the major oil companies will probably get. however, it is dependent on the continuing need and ability of the industry to fund expensive deep , deep drilling projects.

I'm taking an unorthodox view here ...

Steven Leeb's peak oil might hit Transocean hard in an unexpected way ---- Nothing left to drill for in the deep ocean that is economical to recover.

the North Sea is almost finished as an oil producing area. The GOM isn't what it used to be. West Africa is in its heyday right now. but, Brazil offshore is the new frontier for exploration and development. The next 10 to 15 years will be the last harrah for RIG. After that if we aren't transitioning to renewables, society will likely be operating at a much lower level and not have sufficient resources to sink into many (will still be some) 25,000 foot ocean wells.

May 22 11:05 AM

[Mr. Ed, Jr.:]

So, oil is cheaper than coffee and bottled water.....I think what we should learn from this is not that oil is cheap, but that we are taking a real hosing in the coffee and bottled water aisle of the grocery store. And I am also suspicious that the "hosing" we are getting from bottled water is from a garden hose.

May 24 12:06 AM

[lag:]

Abt. 'protecting us from ourselves':

With the excuse of this 'stim ulation' (wonderful eufemism) of the economy, we have payed -did someone ask you if you wanted to?- amounts so big it's obscure... Looks like they want it all to crack -- for then it will be SO easy to control us: fear is paralizing, and many will 'agree' just not to 'not having to fear anymore'. Don't believe what you are told and check out for yourself (not only you, I encourage everyone to do it -- It will not be fun if/when we all get caught 'by surprise'). Beware of ident i ty verification trends, (ver i s i g n, i b m?), holograms, registration of IP-address/calls, tracking of all sorts, new passports, the 'elite' that prin t s -and destroys- the m o n ey, new control methods and N w order. We have to be strong, wake up and believe f r e e d om and good will win at last, and a new, F*REE (I mean REALLY) f r e e market/people will develop, all out from human, sovereign individuals = f r ee actions, but I am afraid this will take some time... We will have to react first, and I have a strong belief in Western/Christian civilization and values, which have resurged again and again. Beware of what happens betw 2*0*10 - 2 >> (sorry, folks, for posting this here, but it really looks bad). We have NO reasons for screaming for government 'protection' (although it might be just what we'll do, that's what they want us to do...) from ourselves. Check out B u*s[h]'s banned speeches in youtube -- they are horrifying (and the c o n gr. applauds!) before it dissapears...

Have faith,
i

On May 21 10:40 PM chopshop wrote:

> Talk about why oil should cost more is one reason talk abounds about
> the end of capitolism. To some extend a society should take care
> and show respect for the average worker, even capitolism. When capitolism
> forgets to allow the average worker a good day and the opporunty
> to hold thier heads up and take care of themselves in a decent mannor
> then talk will come about that societies lack of merrits.
> It sickens and demoralizes that average American to see investors
> root for and even manipulate the markets to profit a few at the
> cost of them and many have seen this now. Don't be surprised when
> the average person does without and does not feel the need to restimulate
> the economy.

May 24 05:33 AM

[Zeon:]

When was the last time that coffee was cheaper than oil? Never? Introducing a fallacy in the first paragraph doesn't instill confidence in the writer's subsequent thoughts. This was a silly comparison to use, as evidenced by the comments.

May 24 10:05 AM