U.S. Recovery Could Push Oil Much Higher

Yesterday on the Connie Mack show, retired Oppenheimer fund manager Bill Wilby made a very simple but very smart observation about oil that resonated with me.

Essentially, he said that oil has made its way up to $120 all the while as the U.S. has struggled economically. Not to turn this into a debate about whether there is a recession or not (or how bad or whatever), but clearly the U.S. economy, which consumes about a quarter of the world's oil supply, has not been going great guns - yet oil has rocketed higher.

Wilby says that when the U.S. does get back on track it could push oil up to $200 per barrel. I'm not terribly concerned about getting to the figure or not, but that big of a move in the next few years would, I have to think, create problems of a harsher magnitude than we think we have now.

In my opinion it seems fairly obvious that China and India's demand will continue to increase and with 2-2.5 billion people combined, even small increases in demand can matter. Additionally, there are a bunch of countries with 70-120 million people that are in a little earlier stage in their development that will also consume more oil over the course of the next decade.

We know there is some oil out there that potentially adds to supply (Tupi, Carioca, Bakken, Alaska) but we also know there is decline (Cantarell, North Sea to name a couple off the top). I've read some divergent opinion as to what the net effect is, but at a minimum, supply would seem to be challenged.

The one part of Wilby's comment I can't reconcile is that from here, U.S. GDP growth really taking off with oil where it is or even $15 lower seems like a big headwind. To be clear, I am saying that if we technically go into a recession and oil stays up around this level, when we come out of the recession to start the next expansion it might be a little more sluggish than normal. So maybe this removes the nearer-term notion of $200, but still maintains a path for higher prices from here as the decade winds down.

The investment implication, if you buy into any of this, would seem to be either an overweight position in energy stocks or if equalweight, equalweight with higher beta than just owning Exxon (XOM) or iShares Energy (IYE).

What about solar and other alternative energies? I think I have more faith in the technology than the stocks. The industry is in its infancy and solar accounts for only 0.06% global electricity consumption. While I think solar will become much more relevant, it might do so with different companies than we know now - point being, be careful with that one.

Comments

[Pandey]

Good analysis. However there is one blind spot. The price of oil is greatly influenced by the strength of the US Dollar. One of the significant factors in the pareto for the high oil prices is a very weak dollar. I think with economic recovery coupled with a strengthening dollar, oil prices should probably move northwards but not so to the extent of $200/barrel.

[buyitcheap]

I'd recommend a trade on Coal, not so much alt energy. Though they do become more viable at that price. If there's real conviction aroudn that trend, why not ultra ETFs, like DIG? rather than the individual equities?

[Kellen H]

I've been reading about the theory of peak oil production for a while now. In the bigger picture, the very big picture, who can dispute the fact that there's only a limited amount of oil to take out of the ground and what's left is getting harder and more expensive to extract. I really am hoping alternative enegy finishes off this race of our planet with a dramatic burst of speed and energy to save our world from the horrors of an oil-dependant world ran out of oil. My greatest concern is that the devoloping nations of our world are still poor enough that they are too busy trying to survive day to day to spend adequate resources reasearching and developing alternative energy sources.

[dilton_dalton]

Oil has risen to $(US)120 even though there is no shortage. Ther are no lineups at the pumps. The rules of supply and demand have been corrupted by speculation. We have even seen reductions in demand due to refinery outages cause crude price increases. If the US dollar gains strength, then the price of oil in US Dollars will decline. If the Federal Reserve lets it be known that interest rates will rise to prevent inflation, the price of oil will decline. If the US administration stop threatening oil producing nations, the price of oil will decline. If the regulators increase the margin requirement for buying and selling oil futures, the price of oil will decline.

[JREwing]

dilton_dalton a little market 101.

The market anticipates higher demand and tighter supply. That's why oil prices are rising. When would you like oil prices to go up? When there is one day of supply left?? When you check out the supply data on the EIA website, you can see that there are around 16 million barrels less supply then last year at this time, overall. In Cushing Oklahoma, which is crucial for the price of WTI, supplies declined by a third compared to last year.

See for yourself here:
tonto.eia.doe.gov/oog/...

Other sorts of crude are not as expensive. These are sour sorts(Iran, Saudi Arabia, Venezuela), which more difficult to refine. They have less pricing power.

check this link:
www.bloomberg.com/apps...

Simple fact is: Oil is harder to find, particularly the good stuff.

If it makes you feel any better. It's not just oil.

Take copper for example: Like with oil, it takes years for new capacity to come online. And the good mines are mostly depleted. When you operate a mine with lower grades, you have to extract more material for the same amount of copper. So it costs more. If the market doesn't pay it, it wont be mined. It's as simple as that.

All in all, I think oil is cheap. Think about it: It is the lifeblood of western civilization. With out it we are back in the 1870s. You can't even bring people to a hospital without it. You can't get food on your table. For every calorie of food we spent 10 calories of oil equivalent. You can't take a warm shower.

I think 300 $ would not be outrageous.

[iphonecanada]

Do you know that in Britain they are paying equivalent of $8.42 / gallon of gas ? In Canada $5.00/gallon of gas ..... We have a long way to go.

[RogerNusbaum]

actually i believe it is correct to say those other countries pay much more in tax at the pump netting a much higher price paid.

[hypratt]

As the price of oil (and gasoline) increases it only makes more sense to stop subsudizing the big oil companies whose profits are obscene and instead get behind new technologies like the compressed air cars in France and Austrailia or the electric cars like the Tesla. Replacing all cars that currently use gasoline would certainly affect demand and prices would come down.

[Robot1]

in the UK we may pay more at the pump, but we have cars doing 50-60mpg!!

[David Lentz]

One thing to consider. If we look back at the dot-com boom, much (if not all) of it was fueled by large amounts of Y2K spending, coming from diverse areas of the economy and compounding in a zillion different ways, resulting a a steady pressure in the IT business, spreading out over pretty much all areas of it. When Y2k came and went, the spending stopped, and a lot of upgrades that had been pulled forward from the 2000-2002 period were not there in 2000-2002, creating the sales vacuum that popped the bubble.

Now treat this rise in oil demand and prices as a problem similar to the Y2K problem. Similarly, there are a bazillion ways to address this problem, all of which require investment, in things from green energy generation technologies to more efficient energy consumption (plug-in hybrids, smarter consumer electronics, etc), to more efficient energy management schemes (smart power grids). This requires considerable investment, and that flow of money can fuel a boom, just as the Y2K spending fueled the dot-com boom.

The tricky part is to not have oil prices rise so rapidly that they cripple the economy. Pain is fine, as pain produces urgency, and spurs investment decisions. But crippling pain, bankruptcy from fuel prices will kill the goose that laid the golden egg.

So I can envision a scenario where US GDP takes off even with oil at the current levels. It would be driven by the burning need to quit using oil. And the only thing that would sustain such a need is the appearance of permanently high oil prices, which we would certainly seem to have, in spades.

just a thought.

[CommodityBubbleproponent]

This is an economic bubble driven by the Federal Reserve and really really cheap money.

We currently have a negative real interest rate, which stimulates demand for commodity related investment.

There is no supply shortage, Iran has tankers sitting at a port with millions of barrels of oil they can't sell, Saudi Arabia is increasing the discount for ALL of it's grades of crude oil relative to WTI, and inventories are at comfortable levels.

Peak oil is an amorphous concept that nobody can accurately predict. Will it happen at some point? Probably. Can anyone say for certain that it is now? No.

I think that the debt bubble collapsing and the resulting fear has more to do with this commodity run up than anything else. The US Fed has mismanaged the world reserve currency and keeps pouring more gasoline on the fire with more cheap money.

Nobody really knows who's speculating in what in the energy markets because nobody monitors the ICE exchange and the derivative trading outside of the NYMEX.

Everyone uses peak oil as an excuse to explain this away when really this commodity boom is a function of excess money and low interest rates. The thing that should make you suspicious is the fact that EVERY SINGLE COMMODITY IS GOING THROUGH THE ROOF AND EVERY INVESTMENT BANK IS PREDICTING AN IMMINENT SHORTAGE OF EVERYTHING. For example, sugar has climbed up ridiculously even though there's a hideous surplus of it around the world.

In 10 years, I'm sure everyone will be screaming about commodity derivatives, ETFs, and horrible risk management at investment banks because of this

[Xenon]

More oil is being found offshore West Africa. Hyperdynamics(HDY) just reported a new play estimated to be in the thousands of millions of barrels of oil in the Republic of Guinea transform margin geological zone. That is just one of many in their 31,000sq mi oil concession. And all selling for $2.16. Check it out!
The U.S. plans on increasing its supply of oil from West Africa by 15% over the next twenty years. While world oil supply is limited we are currently constrained from producing more oil by shortfalls in equipment and professionally trained people. Xenon

[maher]

Wrong!

It will not be US economy recovery that will drive the price of oil towards $200; it will be the coming Iran conflict/war.

It's Iran, Stupid!

[captbob]

If you owned X barrels of oil and when it was gone--(all sold off)--so were you:
Would you:
A. Pump/sell at a rate that maximized your return over the longest period of time. Keeping prices high as other sources depleted and went off line?.
B. Deplete your supply faster by selling greater quantities at a faster rate thereby lowering, the price, total return on your oil and the time you stayed in business?.
Think a second! The Arabs aren't the sharpest knives in the drawer, plus they hate our Guts--(mutual). But this is a No-Brainer!
The only reason they don't cut back and destroy us is they're afraid we'd attack and take the oil for nothing. And Iraq reinforces that feeling. They not only understand force, they live by it.

And stop using IF-in context with a recession--we're there!! The only thing that "Technical" refers to is just how phony the stats really are.

[galewhitaker]

Because of the way oil futures work the economy has not yet felt the effects of $100 oil. In a few months the stuff is really going to hit the fan.

[GraqntHudlow]

ALLIED SCIENCE, INCORPORATED
P.O. Box 2629, 4161 Mary Lou Street, Pahrump, Nevada 89041
alliedscience.org Telephone: [phone] E-mail: [e-mail]


Form Project Summary

Project Name:
Allied Science, Incorporated Coal Fired Powerplant Stack Project
Operate commercial factories that convert the smoke and pollution from the stack of a coal fired powerplant to gasoline and diesel in a sealed system.

General Introduction:
Grant Hudlow FOUNDER,CEO
One person can make a difference, has been the driving philosophy for the life of Grant Hudlow. It was this mind set that led to the birth of Allied Science, Incorporated in 1989. Now, nearly two decades later, with a financial commitments base exceeding $7.5 billion, Allied Science, Incorporated carries it’s message of wholesome, values- oriented products across the United States, Canada, and Europe.
“When we reach people, if we can sell a product, great, but we are first and foremost about spreading our message, “ says Mr. Hudlow. “We want people to know that there is an alternative to the sex, violence and profanity that is in so many homes today.”
Mr. Hudlow attended California Institute of Technology and the University of Nevada at Reno
Before spending 13 months on the Korean DMZ, then an industrial turn around expert with Proctor & Gamble, Stewart Warner, Fuller Paint and Fairchild Semiconductor.
Mr. Hudlow left big business to create Allied Science, Incorporated after realizing the need for uplifting, wholesome discussions that carry a positive messages. “I knew this was something I had to do,” Mr. Hudlow says. Creating Allied Science, Incorporated was more of an important work decision than a business one.”
Mr. Hudlow has since named the chemistry to make this new industry possible, lead the design engineering, sold $7,500,000,000 in orders for factories and sold $7,000,000 in orders for the products from the factories around the world. Armed with the belief of his convictions, he has grown Allied Science, Incorporated from a dream to a major international corporation with more than 200 alliances.
Mr. Hudlow enjoys assisting young people in their entrepreneurial aspirations as well as working with and training school teachers and other professionals. His professional accomplishments and community service have been recognized by local churches and local civic organizations.
Mr. Hudlow has two children and one grandchild.
A little know fact about Mr. Hudlow is his love numbers and statistics. Retired CEO, S.B. Devlin says, “No one sees through a problem faster than Grant. He’s a true statistical genius.”

Terry Ellis, Sr.
has valuable engineering and construction contacts. He has hands on management and business experience with Fluor Daniels, Brown & Root and others

Dr. Chuck Baroch,PhD Chemical Engineering, is a retired CEO with Babcock and Wilcox.

Dr. Davis Clements, PhD, is a Chemical engineering Professor at the University of Nebraska in Lincoln, Nebraska.

Gary Smith is a highly regarded Chemical and Petrochemical Engineer with quality contacts and broad work experience. His experience ranges from blending his own gasoline for resale to employment with major chemical companies such as Dow, Dupont and Union Carbide. Mr. Smith has a BS and MS in Chemical Engineering from the Georgia Institute of Technology. Mr. Smith assists with the engineering and construction of the total project and with the management of the complex.

Lawrence G. Erskine, President Bionomics International,Inc., enjoys a solid management and marketing reputation in the USA, China, Japan, Singapore, New Zealand and Australia. Mr. Erskine owns and operates a Hazelnut business in the state of Oregon and ships finished (value added) Hazelnut products around the world. He imports and exports equipment. Mr. Erskine spent 10 years in management with General Foods Corp. He attended the University of Oregon, obtained a BA in marketing from Northeastern University and attended an accelerated MBA (equivalent) course from Harvard University, via General Foods Corp.

Al Avolicino coupled his education in art with his management and leadership skills to become marketing and advertising manager for some of the largest companies in the U.S. Mr. Avolicino will devote his time to establishing contracts with waste generators and creating the necessary educational campaigns. He will hire and train the marketing and sales people. Mr. Avolicino has enjoyed management positions with such companies as General Foods Corp., Servatron,Inc. and Farmer Brothers,Inc.

Frank Lopez CPA, Lopez and Company,Inc. will be handling the tax and accounting responsibilities for the projects. (Background an resumé available on request)
The Allied Sciences, Incorporated team’s strategic alliances include work with the following:
Elko City Council, Phenol brokers all around the world, Economic developers all around the world, BISNIS, USDOC, USDA, US EX-IM Bank, University of Nebraska, Lincoln, UNLV, UNR

3. Funding Request:
$100,000,000 to build, debug and operate a factory that makes $490,000 a day by converting the smoke and pollution from the stack of a coal fired powerplant to 40,000 barrels a day of gasoline and diesel that sells for $.55 a gallon wholesale

Term:
First tranche: $100,000,000 (to get environmental permits $7,000,000 engineering fee: to buy the equipment $32,500,000; to build the plant $25,000,000 labor and $15,000,000 contractors fee; to debug $8,200,000; operating cost to profitability $12,300,000.

Community Impact:
Allied Science will bring 400 new jobs initially; A $20,000,000 annual payroll; A chemical engineering lab to the local community college; Computers to local children; And money for local infrastructure as needed. In a nutshell, Allied Science, Inc. serves the community by contributing a significant portion ( which has been factored into the base product cost and does not affect returns) of the revenues generated from the factory going to support local charities, help fund community City and State Public Services, as well as supporting biotech and medical research organizations.

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With the allied Science,Inc. facilities, there is NO burning, therefore NO smoke stacks. NO smoke stack means No air pollution. The residuals are distilled water, which is evaporated, and results in an ash which is stored and conditioned for one year after and is used as a non-toxic powder to strengthen roads, make 19,000 lbs. concrete, and for strengthening wallboard.

Specific Performance:
From date of initial funding, Two months to get environmental permits ; Three months to buy the equipment ; Six months to build the plant; Two months to debug ; Three months to profitability.

Exit Strategy:
At end of fourteen months after funding, Allied Science, Incorporated will contractually begin to return 150% of the amount funded for each project. Allied Science, Inc. expects to complete this process within two years of receiving funding.

Supporting Documents:
15 pages of supporting documents are available on request as an attachment as needed.

10. Letter of Introduction from Bank available at later date.

[John L.]

I think many writers make the situation too complicated. Here is a basic recap that summarizes what is going on.

Oil prices are determined by supply/demand and can fluctuate based on perceptions of how this will change near-term. Supply is shrinking, demand is booming in spite of problems in the US economy.

Compounding this of course is the fact that the US dollar has been dropping in real value (the price of gold is the best yardstick) since it went off the gold standard in 1973.

There was a good article in seekingalpha that showed that the price of crude actually hasn't changed for the past 20 years based on how many oz of gold it would take to purchase one barrel. Sorry, I can't find the link

[Jan Sopoci]

Commodity Bubble Proponent,

I read the same piece about all the tankers parked in Iranian oil parked off their shores, but did you miss the part about it ALL being high sulphur crude (3.6%, as I recall, with only Syrian oil being higher at 3.9%). Evidently, there're roughly 236 prices for "oil", based on quality and location (transport to refineries drives price), with WTI and Brent being the quoted "standards".

jan

[Jan Sopoci]

PS:...yeah, SERIOUSLY long oil.