Should We Listen to Boone Pickens on Oil?

|
 |  Includes: DBO, OIL, USO
by: Jason Schwarz

I love Boone Pickens.  He has had a remarkable career, his philanthropic efforts are far reaching, and the Pickens Plan offers a great future for our country. 

There's just one problem with his repeated claim that oil won't go below $100 a barrel.  He has a severe conflict of interest.  Those who are banking on this man's crude oil forecasts are at risk because of it.  Like clockwork, Mr. Pickens appears on CNBC when oil has a big down day to tell everyone that oil will be headed back up.  On Tuesday his rationale was that it's fun for OPEC to make billions and billions of dollars.  He predicts they will cut production to maintain the high price.  

Anyone who has followed the oil spike knows that OPEC lost pricing control a long time ago.  As they increased production, oil prices still continued upward.  So why is Mr. Pickens telling us that oil will stay above $100?  Because the Pickens Plan has everything to gain from high oil and everything to lose from low oil. 

Back when he was merely an investor it was fine to listen to his forecasts as he had the ability to move in and out of positions.  Now there is no backing out of his wind plan.  Pickens' company, Mesa Power, announced a $2 billion investment as the first step in a multibillion-dollar plan to build the world's largest wind farm in Pampa, Texas.  GE (NYSE:GE) has already received the $2 billion order from Pickens and expects another $6 billion in orders from the planned 4,000 MW Pampa project alone. GE will begin delivering the turbines in 2010, and current plans call for the project to start producing power in 2011. 

Ultimately, Mesa Power plans to have enough turbines to produce 4,000 megawatts of energy. Overall, the Pampa project is expected to cost $10 billion and be completed in 2014.  What does history tell us about demand for alternative energy when oil prices drop?  The demand drops as well. Anytime Boone Pickens speaks about oil, his multi-billion dollar wind turbine purchase needs to be disclosed.  

Let's hope that his initiative continues even as the oil bubble bursts.  He certainly has our future government on his side.  Democratic candidate Barack Obama recently pledged $150 billion over the next decade for affordable, renewable sources of energy that includes solar power, wind power, and the next generation of biofuels.  John McCain will be going into greater depth on his plan during this week's Republican National Convention. 

A long term trend away from oil has begun that will send oil speculators running for the hills.  The United States Commodity Futures Trading Commission released a report showing that 4 speculators held as much as 81% of oil futures contracts in July. There are allegations against  Amsterdam-based hedge fund Optiver Holdings that the firm tried to "bully the market" on 19 separate instances by buying large volumes of futures contracts to influence prices. The alleged scheme resulted in a $1 million profit to the defendants. As this manipulation gets cleaned up I would advise against listening to those in the media with conflicts of interest on oil.  The oil bubble will burst in a major way.  Buyer beware.  

Disclosure: Short USO