Oil And Regime Uncertainty

Sep. 27, 2022 10:00 AM ETDBE, RJN, JJE, JJETF, USO, DBO, USL, BNO, OLEM, OILK, USOI, OLOXF, OILX, UCO, SCO, XOP, CRAK, IEO, IEZ, PXE, PXJ, NDP, GUSH, DRIP, XES, UNG, UNL, GAZ, UGAZF4 Comments
Steven Saville profile picture
Steven Saville
1.52K Followers

Summary

  • Even if the political landscape were to become temporarily supportive, it would be too risky to invest in anything other than small projects with rapid paybacks.
  • Regime Uncertainty is a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights.
  • As is the case with natural gas stocks, short-term weakness in the commodity market combined with downward pressure exerted by the general equity bear market could create excellent opportunities to increase exposure to the oil sector within the next few months.

Oil Refinery And Pipeline

imaginima

Editor's note: Originally published at tsi-blog.com

[This blog post is an excerpt from a recent TSI commentary]

Last year US President Biden was telling oil companies that they should be producing less. Then, during the first few months of this year, he berated oil companies for not rapidly increasing their production in response to higher prices. Who knows what he will be telling oil companies to do next year or even next week? In this political environment, why would high-profile, publicly-listed oil companies make large investments in long-term oil production growth?

The answer is that they wouldn't. Even if the next US president understands the need to increase fossil fuel production for at least another 10-15 years and is prepared to stand up to the crowd of misguided environmentalists who seem to believe that renewable energy systems can be created out of nothing, the person that gets the job four years later could have no such understanding and/or no backbone. Therefore, even if the political landscape were to become temporarily supportive, it would be too risky to invest in anything other than small projects with rapid paybacks.

Consequently, we probably have reached "Peak Oil". This is not the Peak Oil that became a popular story during 2004-2008 because there is no doubt that oil production could be increased with the appropriate investment. It is Peak Oil caused by Regime Uncertainty. As defined HERE, Regime Uncertainty is a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights.

Due to Regime Uncertainty, we expect that two things will happen over the next few years. The first is that the oil price will make a sustained move above this year's high (US$130/barrel) because demand will grow (following the 2022-2023 recession) and the oil industry will not respond with large-scale investments in new production. The second is that there will be substantial growth in the amount of wealth returned by oil producers to their shareholders via dividends and share buybacks.

As is the case with NG [natural gas] stocks, short-term weakness in the commodity market combined with downward pressure exerted by the general equity bear market could create excellent opportunities to increase exposure to the oil sector within the next few months.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Steven Saville profile picture
1.52K Followers
I graduated from the University of Western Australia in 1984 with a degree in electronic engineering and from 1984 until 1998 worked in the commercial construction industry as an engineer, a project manager and an operations manager. I began investing in the stock market 2 months prior to the 1987 stock market crash and thus quickly learned about the downside potential of stocks. Only slightly daunted by the rather inauspicious timing of my entry into the world of financial market investments, my interest in the stock market grew steadily over the years. In 1993, after studying the history of money, the nature of our present-day fiat monetary system and the role of banks in the creation of money, I developed an interest in gold. Another very important lesson soon followed: gold may be the ideal form of money for those who believe in free markets and a wonderful hedge against the inherent instability of the government-imposed paper currencies, but it is not always a good investment. By mid-1998 the time and money involved in my financial market research/investments had grown to the point where I was forced to make a decision: scale back on my involvement in the financial world or give up my day job. The decision was actually quite an easy one to make and so, at the beginning of 1999, I began investing/trading on a full-time basis. My major concern in deciding to pursue a career in which I devoted all of my time to my own investments was that I would miss the personal interaction that had been part and parcel of my business management career. The Speculative Investor (TSI) web site was launched in August of 1999 as a means for me to interact with the world by making my analysis/ideas available on the Internet and inviting feedback from others with similar interests. During its first 14 months of operation the TSI web site was free of charge, but due to the site's growing popularity I changed it to a subscription-based service in October of 2000. Its popularity continued to grow, although I remained -- and remain to this day -- a professional speculator who happens to write a newsletter as opposed to someone whose overriding focus is selling newsletter subscriptions. My approach is 'top down'; specifically, I first ascertain overall market trends and then use a combination of fundamental and technical analysis to find individual stocks that stand to benefit from these broad trends. This approach is based on my experience that it's an order of magnitude easier to pick a winning stock from within a market or market sector that's immersed in a long-term bullish trend than to do so against the backdrop of a bearish overall market trend. Fortunately, there's always a bull market somewhere. I've lived in Asia (Hong Kong, China and Malaysia) since 1995 and currently reside in Malaysian Borneo.

Recommended For You

Comments (4)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.