Forget $100 a Barrel - Oil Will Plummet to $30

Includes: DUG, GM, HMC, TM, USO
by: Jason Schwarz

UPDATE: On August 20, I was interviewed on Fox Business News regarding this article. The video appears below: 

Remember all those times OPEC tried to tell us that they didn't want high oil prices and we didn't believe them?  Well, they meant it.  They knew that technology was available to crush oil demand but they hoped that the low price of oil would keep the technology buried.  The cat's now out of the bag.  The commodity run is over.  The talking heads are trying to temper the recent selloff in oil by saying that it will settle around $100 a barrel but that is not what happens when a bubble bursts.  Oil is headed back down to historical levels between $30-$50 a barrel.  Consider the following evidence:

1. Oil consumers quickly adjust to high gasoline prices.  June data from the IEA reports a 4.7% drop in miles driven by Americans year over year.  That equals a loss of 12.2 billion road miles of oil demand in just one month.  The adjustment has come without a hitch.  Staycations have replaced vacations.  Honda (NYSE:HMC) Civics have replaced Chevy (NYSE:GM) Tahoes. 

Not only are we driving less, we are using less gas while we drive.   Everyone was shocked at the gigantic $6.3 billion loss reported in GM's latest earnings announcement. What has happened to automobile demand in just two months is astounding. You only have to go through that type of pain once to never let it happen again.  The gas guzzling SUV market has collapsed overnight.  Americans have proven how easy it is to adjust to high oil.  

2. New transportation technology has arrived.  GM recently announced its goal to have 1000 hydrogen fuel cell vehicles on California highways by 2014.  Honda expects to have 200 Hydrogen FCX Clarity's within three years.  California is leading the American innovative push with 26 hydrogen fuel stations already in operation, headlined by Shell's (NYSE:RDS.A) recent opening of the first retail station to sell both gasoline and hydrogen.  Of course these numbers are small but they are extremely significant. 

Hybrid numbers started small too.  Toyota (NYSE:TM) just announced plans to unveil a new Lexus hybrid and the next generation of its hot selling Prius next year as the company expects to hit the one million mark in hybrid sales by 2010

3.  The next President of the United States will implement alternative energy on a grand scale like never before.  John McCain wants to build 45 new nuclear reactors by 2030 and ultimately wants 100 new nuclear plants in the U.S.  He also proposed a $300 million prize to the auto company that develops a next-generation car battery that will help America become independent from oil. 

Barack Obama wants to create a $7000 tax credit for purchasing advanced vehicles and mandate that all new vehicles be 'flexfuel' by the end of his first term.  He also wants to require U.S. utilities to get 25% of their electricity from renewable sources like wind and solar. 

Oil tycoon T. Boone Pickens has been traveling around the country touting his wind plan.  He claims that the Great Plains states are the Saudi Arabia of wind.  North Dakota alone has the potential to provide power for a quarter of the country.  A Stanford University study found that there is enough wind power to satisfy global demand 7 times over-even if only 20% of wind power could be captured. 

We are also seeing technological breakthroughs in geothermal energy.  Raser Technologies (RZ) can now produce energy from just 180 degree heat through portable mini-power plants.  The plan to replace oil is now the top concern of U.S. citizens.  Government subsidies will keep the alternative energy trend alive even as oil prices fall.  

4.  The last piece of evidence for a decline back to historic oil price levels is actually a secret that neither the green people nor the oil people want us to know about.  The secret is that new oil is plentiful. Oil drilling rigs are booked until 2012.  Recent finds include Brazil, the Gulf of Mexico and Africa.  

To illustrate what's happening - we're invested in a small company called Freedom Oil and Gas which is preparing to drill in Southern Utah just north of the recent Wolverine discovery well which represents the largest U. S. onshore discovery in the past 30 years. Wolverine has drilled 10 out of 11 successful wells in its field, and is currently producing in excess of 6,000 barrels of high gravity, crude oil per day.  Freedom estimates that a new discovery will provide as much as 150 million barrels of oil reserves, with each well producing as much as 1,000 to 2,000 barrels per day per well. 

The conclusions are obvious.  If you are thinking that the oil drop in oil to $115 a barrel is all we're going to see than you haven't connected the dots.  This oil spike was a bubble fueled by a group of deceived investment speculators who failed to account for adaptable demand destruction from consumers. The technology to replace oil already exists and high oil prices merely provide the necessary motivation to bring these products to market. 

The United States is leading an alternative energy charge that will spread throughout the globe and cause a major shift of power away from the Middle East.  I'll save the ramifications of such a power shift for another article but simply stated, OPEC's greatest fear has been realized.   Short oil.

Disclosure: Short USO, Long DUG.