Oil: The Inconvenient Truth 66 comments
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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 (XOM), ConocoPhillips (COP), and Chevron (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 (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 (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 (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.
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Agree with you 100% about how undervalued the oil majors are. STO at $27 is indeed ludicrous. We are talking about one of the largest oil cos in the world backed by significant Govt of Norway holdings. When we see a company like DVN trading at a price/cash flow of 5 (The S&P avg is 12.3) growing their earnings at 30-40% annually you know that traders have lost their minds. I don't know what to think but the cynical side of me is starting to believe we are seeing manipulation ahead of the November elections. It was not too long ago (summer of 2006) where we saw oil prices taken down by some curious moves by investment banks (Goldman Sachs re-weighting of its commodity index). Why would they do that 3 months before a mjaor election? It was no accident. This time we are seeing a repeat performance with an orchestrated attack on oil prices so November voters see some relief at the pump before going to the polls. All of this must drive the oil cos crazy because it has nothing to do with fundamentals and makes their operational planning that much more difficult. Anyway you look at it, energy stocks are extremely cheap and undervalued right now.
Yank
If I subscribed to conspiracy theories, I would a draw a comparison of the current situation to the summer-fall 2004 (when Bush was up fro re-election) and oil dropped $10 a barrel. Wasn't the current US Treasury Secretary Henry Paulson the CEO of Goldman Sachs ? LOL
One gets an uneasy feeling seeing a majority of our off-shore oil reserves smack in the middle of hurricane alley.
We are so vulnerable to a 100 year storm, CAT 5, taking out 1/2 of our oil/gas production, small as it is.
Anyone with any experience in risk management, would immediate decide that other off-shore areas should be incorporated into our production fields.
CA, Alaska and the east coast come immediately to mind.
The other point is that we dont drill in CA for fear of a leak, and we have not ever had a CAT ? storm. Given that the rigs in the gulf survive CAT 2 or 3 storms every year and leaking is hardly an issue, the hesteria in CA is much to do about nothing, given todays rig technology.
Finally, it turns that NOT drilling in the off-shore of Santa Barbara, CA, causes oil leakage from the oceans surface that would end if the reserves were taped and the pressure releaved. To the point where the locals, who are hardly "drill friendly" have actually voted to have production be turned back on and the pressure releaved to elimenate leaking from the ocean floor.
thanks for article.
Man made global warming is a hoax being thrust upon the American public so that AlBore can make extreme, excessive, windfall profits at our expense.
Brian, don't know if we'll ever agree on something again but thanks for the post!
Lawrence Sikarskie
swim: heh heh.
yank: i was going to mention the election manipulation issue, but i didn't feel like fighting all those folks who would have jumped on me!
that said, i tend to agree and certainly agree with you on current energy stock valuations.
longoil: exactly. however, as i opined in the article, i am not so sure the price drop can be blamed on slack US demand as rising consumption in china, russia, india, and the middle east is sucking it up. unfortunately, it takes some time to see those numbers. i tend to lean toward re-election posturing....
jack: yup, i am all for drilling as any production here keeps more US dollars in the US. that said, we can't get close to replacing the 15 million barrels we import every day. the only solution is an alternative to the gasoline powered internal combustion engine to cut consumption.
.*. thank you for the illuminating criticism. i suppose we agree that each other's words are useless. that said, at least i have an opinion. you say i am not logical, but point to no examples to debate. why even post your comment?
Mmarrkk: yeah, California sucks..its just home to some of the best technical colleges in the world as well as home to most of the most brilliant computer scientists. it's also one of the world's biggest economies. yup, terrible state.
sikarskie: i am doubtful of any "regulations" wrt wall street. the place is running open loop these days. i think the big investment banks are able to do just about anything they want to the price of gold and oil and currencies. its a rigged game and the rest of us just tag along hoping we're participating in "free markets". it's all double-speak and smoke and mirrors.
Thanks
Forgot to mention Berkley...never mind, I'd rather keep them forgotten for a long time. The grapes are good though and some of the wine is excellent! Don't get me wrong, I have family that live there and its a pretty state. But politically, the state as a majority is just totally screwed up. And they are exporting that via Pelosi, Boxer, Waxman, et al. Unfortunately, we have to live with those retards.
I am trying to convince my California brother that the election has been moved to December 1st due to problems with the voting machine software; too many people expected to vote so Democrats are being asked to vote in December to help ease the overflow. I told him its not fair as they will know how many votes they will need to win. It might just work :) Heck, if he's willing to vote D, he just might believe it! We can only HOPE and CHANGE!!
Did you see where the Mexican gov't announced that Canterrel production dropped more than even they were forecasting? Saw a columnist today who was "surprised". I'm not. I expect it to decline exponentially from here on out. What's going to replace it?? Hopefully Iraqi oil fields. Lots of oil waiting to be tapped there once we get the whacko's under control.
Now, all that said, yes lets do things cleaner. Lets use more clean burning nat gas, clean coal technology, nukes, etc. Wind too. Okay Teddy, can we please put a wind turbine up near your house?? Lets just not get frantic and collapse our economy over it. I'd rather they fix Social Security first, than deal with the climate change as an emergency. OF course, any mention of doing that is met with screaming and gnashing of teeth.
As far as the ice caps are concerned I will refer you to Freeman Dyson, "Just because you see pictures of glaciers falling into the ocean doesn't mean anything bad is happening. This is something that happens all the time. It's part of the natural cycle of things. We know from measurements that glaciers have been melting for 200 years at least. So it's certainly long before human activities could have caused it.
What we also know, going back 4,000 years, is that the glaciers were actually a lot smaller. They actually grew in the meantime. So it seems to be some sort of cyclical process. They grow and shrink and there's no particular reason for being worried just because they're shrinking at the moment. I'm not saying there's no climate change. Of course there's climate change. Climate change is part of the normal order of things, and we know it was happening before humans came."
www.salon.com/books/fe...
I’m in Iraq now and the situation on the ground is going so well that we’ve handed Al Anbar Province back to the Iraqis, oil is being pumped out and with China investing 1.5 Billion this year alone plus all the major oil companies getting no bid contracts to redevelop the infrastructure here, it’s only a few years until Iraq is up to 4.5 mil barrels per day. Still the threat of Iran still looms on the horizon, it’s going to be a wait and see approach, only thing I know is that I’m buying more Iraqi Dinar asap. Once they readjust their currency it’s going to be a day in paradise.
Oh yeah, I have to agree with my mans opinion about Cali….bunch of weirdos…plus 38Billion in the tank when Arnold took over, not very effective management, don’t forget about that.
Eventually we'll come up with some process that uses plant matter and nanotech and electricity to generate liquid fuels. Or we'll have batteries that can go 400 miles on a charge and charge overnight. But we aren't there yet. And might not get there before oil is in very tight supply.
On another post to a similar question I saw a suggestion that the government add another $1/barrel tax every month to oil. This will gradually increase the economic incentive for alternatives while curtailing consumption now so it lasts longer. In 8 to 10 years when this brings oil into the $200/barrel range we will have viable alternatives.
As Miky observed we *depend* on cheap individual transportation for our civilization. We need to take care of this issue. Or change our lifestyle.
The trouble with investing in these essentials like oil and water that look like they are heading for critical shortages is that they *are* critical resources. So you are guaranteed government intervention, making your investment a crap shoot.
Great solution. Beach vacations closer to home=Less driving=Decreased oil consumption=less CO2 emissions.
All we have to do is melt the polar ice caps to get out of this mess, plus when the oceans retreat again, there will be a surplus of oil left over from the decomposition of the flooded civilizations. Everyone grab your household hairdryers and meet me in Alaska.