Oil: The Inconvenient Truth

Includes: COP, CVX, STO, XOM
by: Michael Fitzsimmons

The title alludes to my feeling that the biggest challenge facing mankind (especially mankind in the USA) is not "global warming", but a future in which worldwide oil supply will not keep pace with worldwide oil demand. I have often commented on Seeking Alpha that the "oil problem" has the ability to induce catastrophic consequences by 2015 and is therefore the more imminent issue to be addressed. Since the solutions to both global warming and the "oil problem" are the same, focusing on the nearer term problem would seem more logical to me. The problem, of course, is that those in power apparently disagree.

In this day and age of media and political double-speak, it did not surprise me that hurricane Gustav actually made oil and natural gas prices fall dramatically. After all, Gustav only shut-in the majority of US oil and natural gas production in the Gulf of Mexico along with a few refineries in the area. The Bush administration announced it would be ready, willing, and able to release oil from the Strategic Petroleum Reserve to those companies requesting it. This apparently calmed the market and oil sold off to $109/barrel, or thereabouts. Oil swings so wildly these days, it's hard to keep track of its daily moves.

Yesterday morning on CNBC, Larry "Goldilocks" Kudlow was ebullient as the market was up over 200 points early on and oil was selling off with a vengeance. Kudlow predicted further gains for the market and further drops in oil. Unfortunately for Larry, later in the day oil firmed up and the market sold off, ending down for the day.

Of course the inconvenient truth for the equity markets is OIL. The US has this little problem of needing to import 15 million barrels of oil a DAY to satisfy its economic (hedonistic?) thirst. Kudlow would have you believe that the price of oil has come way down, but everything is relative. Relative to $145/barrel oil seen earlier this year, it has come down. Relative to the price of oil one year ago ($70/barrel), $109 seems quite expensive. Perhaps not to Goldilocks, but to me. It wasn't that long ago that $100/barrel oil was considered by many respected economists to be "economic doomsday" for the US. I think the jury is still out on that one....

The SPR will save us from any Gustav induced oil supply hiccups. What is the capacity of the SPR anyhow? 720 million barrels? Hmmm...let's see...that covers 48 days worth of US imports. I dunno about you...but that doesn't sound like very much at all. (That's probably how many days the FDIC's reserves can shore up our failing banks.) Well, I suppose it will get us through the short-term supply issues brought on by hurricane season, but does the SPR have the ability to weather a really serious supply interruption? Perhaps the shutting down of the Straits of Hormuz for example?

Meantime, oil production at Exxon Mobil (NYSE:XOM), ConocoPhillips (NYSE:COP), and Chevron (NYSE:CVX) is down year-over-year. Mexican, Russian, Venezuelan, and Alaskan oil production is all down year over year. On the geo-political front Brazil might nationalize Petrobras (NYSE:PBR) and Russia has shown it has the ability to take out the BTC pipelines any time it wants. The Iran problem hasn't gone away and Cheney is visiting Caucasia to show support for oil & gas pipelines which skirt Russia. This last issue is important for Europe's energy security. I only wish Cheney was as concerned about American energy security. Perhaps then we'd have a strategic, long-term, comprehensive energy policy like this.

But we don't have a US energy policy other than to drill, drill, drill. Don't get me wrong, we should drill. That said, anyone who thinks the US can produce the 15 million barrels of oil a day it current imports by drilling offshore in US waters is dreaming. We need a *comprehensive* energy plan. Its doubtful we'll ever get one. Why do I say that? Well, I can't get anything published along these lines at Barron's, the Wall Street Journal, BusinessWeek, etc.

Also, did anyone notice NBC refused to run Boone Pickens's latest commercial about Iran switching its automobiles and trucks to natural gas? Actually, NBC finally reversed its decision, but only after Pickens sent out an email to his PickensPlan army detailing NBC's earlier refusal. Bottom line is this: the US mainstream business media is censoring logical energy proposals that would cut our dependency on foreign oil. Why? Like the old investigator said, it's not "what" or even "how" that's interesting, its the "why"? Why would mainstream US economic media (one would think they would actually care about the US economy...) not want to see the US strengthen its energy profile, cut down on US money going to unfriendly nations, and increase its national security? Strange. Very strange.

People say, but Fitzman, look at all the demand destruction in the US. Yes, it is true there is some decent demand destruction in the US. However, this is not a result of strategic policy iniatives, but more a testament to the lousy economy and the hard times the American middle class is having making ends meet. Besides, I am not convinced that US demand destruction is not being sucked up by increasing demand in China, Russia, India, and the Middle East - all of which are showing brisk sales of automobiles and light trucks.

All this said, of course gold and the energy related stocks all sold-off mightily yesterday as GM (NYSE:GM) and the home building stocks rallied. In this Orwellian market, driven by the double-speak of talking heads (I suppose one could throw me into that category as well), nothing surprises me. However, one needs only to gaze a little bit into the future to understand that COP selling at $79, XOM at $77, CVX at $83, and Statoil (NYSE:STO) at $27 and change are absolute steals. STO was down almost 10% yesterday(!).

Of course, one could also buy stock in the autos, finance, home building, and "early cycle consumer goods" sectors as the talking heads were advising this morning on CNBC. Either way you choose to go, think strategically...and good luck to you!

Disclosures: The author is long COP and STO.