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.
