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Currently fashionable erroneous economic assumptions, Part I: Oil

|Includes: CVX, GS, PZE, WFT, Exxon Mobil Corporation (XOM)

    Once again, I have been sufficiently stunned by other people's mistakes to return to my keyboard.

   The other day, I came across an advisor certain that:

  • Oil must rise
  • The Dollar must fall
  • The rally will continue
  To this list I will add another I see around a lot - 
  • China will economically dominate the world
   I won't pretend I don't know why these beliefs are so popular these days - it is always easier accept and restate fashionable beliefs. Critical thought is hard, almost as hard as original thought. But this sort of thing produces expensive contrary lessons, and needs to be challenged; preferably in real-time.
   These will necessarily be space-consuming, so for ease of digestion, I will split them up in separate posts.

   Oil: The future here is grim. For oil.
    Most petro consumption is commercial - planes, trains, and trucks (and ships) pushing goods from point of production to market. A swift destruction of credit supply, in a debt based economy, means many former purchasers will not be able purchase. That's why they call them "depressions". Reduced purchases = inventory pile-ups = reduced shipments = reduced petro consumption = lower oil. 
    But depressions don't last forever. They can last 10+ years, which will seem like forever, but they end, and with that ending, demand can be expected to rise, right? And forward looking markets should be expected to price that in, right? 
    The longer term prospect for oil just keeps getting worse, the farther out you go. I have already waxed eloquent about the late Dr. R. W. Bussard's "whiffleball" fusion reactor design, in another post, which I will not repeat here, save to mention that,
  1. it has gotten solid funding,   and
  2. it might still take decades to deploy.
    But might oil not manage to squeeze in a solid rally, betwixt the foreseen end of the depression, and the beginning of the Age of Fusion Power? "Decades" is a long time. 
   No. It turns out, we don't have to wait that long. A new generation of fission reactors is being licensed, as we speak, by a company named Hyperion. (Privately held - sorry, guys, I was as disappointed as you). These are, in practical terms, pretty much foolproof fission batteries, with a target power cost of around .2¢ per kilowatt-hour! 
   Take a moment to absorb that number. That's point 2 cents. That means your teen-age daughter could get distracted by texting, and leave a modest hair-dryer on, for hours, without you noticing an affect on your power bill.
   Now, I don't doubt the capacity of our government to hold back the adoption of great new tech like that here in the US. In fact, the very fact that it will challenge the Green agenda, and fatally gore a lot of fashionable infrastructure, means such efforts will be mounted. But it turns out, the rest of the world is already buying these glorious little pods, and everywhere they are installed is a place that will stop burning oil. Such marginal demand reduction will be quite enough to keep oil on its knees.
   The only bright spot for oil is that depressions tend to reduce marginal supply, by eliminating marginal suppliers, which means any geo-political disruptions (which is a fancy way of saying "war") will have an exaggerated effect on price for the duration. 

   How to play this? In the short run, go short/ hold puts on 
  1. USO - contango costs will work with you as it drops, tending to exaggerate long term declines 
  2. (almost) any Big Oil company - I specifically exclude XOM, as this firm at least remembers what it is: an oil company, and that sort of clarity tends to limit certain kinds of errors. My favorite "dog" here is CVX, which appears to have swallowed the Green agenda whole.
  3. In the shorter term, "oil service companies". That's a fancy way of saying drillers. I am personally going against WFT, mostly just because GS likes them!
  4. Brazil's stock markets tend to trade as more volatile proxies of the US oil  patch. PZE lets one bet on both trends at ther same time.
(Disclosure: practicing what I preach in every case mentioned)