Reasons to Love 3-Digit Oil

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Includes: BP, COP, DBO, F, GM, HMC, OIL, PBR, TM, USO, XLE, XOM
by: Marc Courtenay

We recently had the displeasure of having to driving around the freeways of southern California. Some of the more congested ones like the 405 and the 101 have 6 or 8 lanes of traffic, and at rush hour they are all clogged with mostly single-driver cars.

Yet this time there was a noticeable difference. Drivers seemed to be driving more slowly and the speed demons were fewer in number. There were fewer pick-up trucks and enormous SUVs.

The price of gasoline in LA and Orange Counties is pretty close to $5 a gallon, and it is beginning to affect driving habits. I heard a number of people and radio shows talking about cutting back on the number of needles trips in their automobiles.

People are beginning to talk about "car-pooling" again (for the first time in 25 years) and the buses and metro-trains are jammed full with riders who don't want to pay for expensive gasoline. As I predicted, Americans won't become diligent about conservation until it costs them dearly.

One of my mentors, Dr. Stephen Leeb who writes The Complete Investor recently sent me this observation from an international trip he just returned from and it certainly makes the case for us all getting used to expensive oil.

It seems clear to us that if oil were to rise much higher than $150 a barrel, its impact on the world economy would be severe. Probably, growth would short-circuit.

On the other hand, if oil prices fell back under $100 (as most drivers currently pray), everyone might breathe a sign of relief. But that relief would be short-lived.

Cheap oil now would only discourage new oil projects from coming online. It would put serious alternative energy development on hold. In the long run, energy would become even scarcer and more expensive.

When I was at the energy conference in Rio, a couple of weeks ago, one place we visited was the Petrobras facility. Petrobras, as you should know by now, is a Brazilian oil producer. In fact, it is the fastest growing major oil producer in the world, and the 2nd largest after Exxon Mobil, in terms of market capitalization.

Petrobras (NYSE:PBR) made headlines in recent months when it announced potential production of tens of billions of barrels of oil from deposits located five miles under the ocean, and under a further mile or so of heavy salt that constitutes the ocean floor. Wall Street analysts were less optimistic. Some suggested Petrobras would be lucky to extract one billion barrels of oil. Bringing this oil to the surface represents an enormous challenge from an engineering and geological standpoint.

The morning we visited Petrobras, Bloomberg reported that the company plans to spend more than ¼ trillion dollars to develop this reserve. Even if the company is lucky enough to pump two billion barrels of oil, oil prices would have to be above $120 before Petrobras could cover its costs. Add a fair profit to that, and oil prices would probably need to be closer to $200.

Developers of this sort of project face a clear dilemma. If oil were to fall back to near $100 and remain there, deposits like this would not be profitable and will not be developed. The world would then be in greater danger from growing oil shortages.

On the other hand, if oil prices rose to $240, another set of risks takes over. When Petrobras' estimated it would cost a quarter trillion dollars to develop this oil field, it assumed oil prices would be closer to where they are today. But what everyone forgets is that oil prices add to the cost of producing all commodities. Oil at $240 would drive Petrobras' costs for materials and energy considerably higher, possibly making this project unaffordable.

Frankly, we hope oil prices decline a little from their current heights in the mid $130s -- perhaps to $110 or $120 -- and stay there for a while. We would be less troubled by dreams of an immanent economic disaster.

At the same time, we don't want oil to remain stable so long that the world becomes even more complacent about the energy squeeze. Even at today's high prices, people aren't nearly worried enough about oil.

Much has been made over the fact that Americans have cut back a little on gasoline consumption. Sure, some people are driving less due to high gas prices, but not most people. What's more, while oil consumption is down year-over-year, so is supply. And, unfortunately, supply has fallen faster than demand. So we are less secure, rather than more.

Besides, conservation alone will not ultimately solve the energy problem. It will take strong leadership and a vast amount of research and investment to do that.

So this is a big part of the "mandate" that we the people need to give to the politicians now and this November. We must let them know that we aren't going to tolerate more of the same mindless leadership that is unwilling to formulate a national energy policy that doesn't emphasis the importance of sustainable energy.

If you want to see a dramatic illustration of what lack of planning and preparation in the energy patch can lead to and how badly the consumer is penalized by government's ineptness to create and maintain a successful energy policy, look at the 1 year chart below for oil future.


Closing Crude Oil Futures Price

We ought to be telling the American auto companies, especially General Motors (NYSE:GM) an Ford (NYSE:F) that we want to be at least as good as Toyota (NYSE:TM) and Honda (NYSE:HMC) in creating hybrid, green cars.

There is no excuse why we don't have electric cars, hydrogen fuel cell cars, water-based "HRO" autos that don't pollute the air and can actually create more oxygen as an emission from the cars exhaust. These technologies are already available and could have been massed produced in the past 20 years.

As the movie-documentary "Who Killed the Electric Car" points out, there was a concerted and powerful effort make by some super-influential corporations to make the US and he West dependent on fossil fuels for a long, long time.

I wonder if Exxon Mobil (NYSE:XOM), ConoccoPhillips (NYSE:COP) and BP (NYSE:BP) might know who those super-influential corporations are? Whose elected politician and representatives conspired to make us all addicted to foreign and domestic oil at any price?

So the time to tell the politicians that we are "..mad as hell and we won't take this anymore"is now, right now! We want solar energy, we want sustainable sources of fuel that won't cause greenhouse gas pollution or poison the oceans and our drinking water. Not tomorrow, not next week, but right here and right now!

The only reason we should learn to love 3-Digit oil ($100-a-barrel up to $999) is because that is what it takes to get us fired up enough to break our addiction to toxic, environmentally hazardous forms of fuel like oil and for that matter coal.

Outrageous energy prices will make us seek "green solutions" and help motivate us to be better stewards of the most beautiful planet in our solar system. It might also embolden us to force our elected officials to stop squabbling and start funding alternative sources of clean energy.

Disclosure: Author holds long positions in some of the above-mentioned securities