|Anyer - re: Oil and Oilstocks...................|
There are more than a few "conundrums" for those who think Peak Oil is here and now and that Oil and Oil stocks still have considerable upside.
1. If the Oil Permabulls & the Matt Simmonsites are correct - then the Major Oils and the vast majority of E&P Companies have a very big problem for their stock price.
- replacing reserves and growing production...which is the anthesis to the entire Peak Oil thesis.
- simultaneous ramping of costs - in everything from dayrates for drilling, to rising energy and commodity costs within their operations.
- given this is far from an undiscovered, or underinvested story... what happens to E&P Shareprices if Oil & Gas prices retrace, or even remain flat ? - what will then be the upside driver to E&P shareprices with flat, or worse yet, declining Oil/Gas prices with simultaneous ramping costs ?
...the only upside is Arjun-Mary Meeker-Murti's $105 Call... if you like that bet - take it...
2.The gathering cloud of an Economic slowdown on both the US and the Global Horizon...
- just in this mornings Financial Times - on page 2, Europe is rolling over econmically, Germany which had started to recover, has now rolled back over... in the USA where it takes time for High Oil Prices to feed thru the Economy, Greenspan for the first time - just announced that High Oil Prices are now having a significant, negative effect upon the US Economy.
- the US Consumer and Economy are living on borrowed time via a historic stimulus package of Tax Cuts, a Housing and more importantly - a Refinancing Boom and the reckless availability of cheap Credit. Today the US Consumer has a "0" savings rate, a record personal debt level, has his traditionally largest asset - his home, tied to a Bubble in housing and from the headlines ranging from Kimberly Clark to Hewlett Packard - Job Cuts in the USA have now reached their highest levels since Jan. 2001 and there is no wage growth !?!
... I say - "tic toc" and once again will remind Oil Permabulls that "Bad Macro (slowing global economy) always trumps good micro (positive Oil Fundamentals).
For the OSX, Service and Drilling Companies...
- I'll start with "Remember Freide Goldman - FGI/FGH ?"
Today's Boom, often becomes tomorrow's Bust.
Today's Darling, tomorrow's Dust.
The OSX components do not of course receive their earnings from the Price of Oil, but rather from the Cap Ex Spending of the Producers - often based upon their longterm expectations for the Price of Oil.
So, when CEO's like XOM's Lee Raymond, BP's Lord Browne all say there is no shortage of Oil, no fundamental reasons for prices to be at this level... people should listen.
Even VLO's CEO William Greehey, who was on CNBC around the 4th of July, echoed the comments of Raymond & Lord Browne - in that there is quote/unquote:
- no shortage of Oil.
- no fundamental reason to support prices at this level.
During that same week 2 New LNG Facilities were approved in the USA (see later comments on INCREMENTAL SUBSTITUTION*)...but, yet we have no US Company willing to spend the money to build a new US Refinery ?
Don't tell me about permiting, or environmental issue's either... LNG Facilities face the same challenges with permiting & environmental challenges.
If XOM wants to build a New Refinery... it would get built.
We've gone thru these "Peak Oil/Oil Crisis-Shocks" before...here's a walk back in time to 1979-1980 during that Oil Shock-Crisis where all of the Energy Experts were calling for the End of Cheap Oil...only to see Oil Prices literally collapse soon thereafter:
From the Tocqueville.com Web Site:
"Even with decontrol of oil prices, we can see a 30 percent to 40 percent decline in domestic oil production." Daniel Yergin – Sierra July/August 1979
"An already serious energy problem has now become an energy emergency, an emergency that will persist throughout the entire 1980s." - Robert Strobaugh and Daniel Yergin - Foreign Affairs vol.58, no.3, 1979
"World oil prices have only one way to go in the next decade--up, and probably sharply so." - John Mattill - Editor, Technology Review -December/January 1980
"During 1980 and 1981, for each barrel of oil newly produced as a result of decontrol, the cost to the U.S. economy could range from at least $56 per barrel under the most optimistic assumptions, to about $870 per barrel under assumptions which many experts believe are realistic...Thus even if decontrol does in fact stimulate a few extra barrels of oil, the total cost to the economy of those few barrels is so high as to make decontrol the most nonsensical, irresponsible, and expensive energy supply strategy imaginable." Energy Action - March 24, 1979
"Ronald Reagan brushed aside energy issues during the campaign, insisting the shortages could be overcome by unleashing private enterprise. But not even his most fervent supporters in the energy business share that optimism. Virtually all private forecasts predict declining domestic oil production and liquid fuel shortages in the next decade." New York Times - November 14, 1980
"There is a dwindling supply of energy sources. The prices are going to rise in the future no matter who is President, no matter which party occupies the administration in Washington, no matter what we do." - President Jimmy Carter - March 31, 1979
"At present rates of exploitation, the United States will exhaust its own petroleum reserves in about 10 years..." - Alan Madian - Foreign Policy - Summer 1979
"Any surplus production capacity that individual OPEC countries may have developed in recent years will almost certainly vanish by the mid-1980s, perhaps sooner... In 1990 prices, adjusted for future inflation, oil could be selling for $42 to $55 a barrel." - U.S. Department of Energy - National Energy Plan II - May 1979
"The present oil shortage looks like the start of a long siege. While the demand for oil keeps growing as world population and economies expand, supply slows and it is difficult to see where large amounts of additional oil will come from in the next several years." Leonard Silk - New York Times - June 29.1979
"We're heading into a world of considerably higher prices. There will be a major impact on housing by 1983, and I'd be surprised if gasoline is less than $2 per gallon plus whatever inflation adds." Kenneth Arrow, Professor of Economics, Stanford University - Forbes - February 4, 1980
"It's obvious that gasoline could reach at least $2 a gallon after decontrol." Representative John Dingell (D-MI)Chairman, Subcommittee on Energy and Power – Forbes December 10, 1979
"Estimating $1.50 [per gallon of gas] is totally, totally optimistic." Dan Lundberg, Gasoline price specialist - New York Times - February 27, 1980
"Without rationing, gasoline will soon go to $3 a gallon." Senator Dale Bumpers (D-AR) - U.S. News and World Report - July 9, 1979
à Note: gasoline prices did not reach $2.00 until 2004
"One thing is for certain: prices will continue to rise. We're dealing with a scarce, finite commodity, one that will be running out in a couple of decades. Traditional criteria of supply and demand don't apply." Charles W. Duncan, Secretary of Energy - U.S. News and World Report - February 25, 1980
"We're going to be on the ragged edge for years." Clifton C. Garvin, Jr. - Chairman, Exxon Corp. - Business Week - December 24, 1979
"With oil, surprises or changes can only go one way: against us." Paul Frankel - Petroleum Economics, Ltd. - Dun's Review - April 1980
"The price of oil now seems firmly locked into a steep upward spiral for the foreseeable future." Business Week - December 31, 1979
"At present rates of consumption, America's oil and gas will be gone within a decade." Newsweek - July 16, 1979
"In moving towards 1990, the industrialized countries will be walking an `oil tightrope.' " International Energy Agency - Energy Conservation 1981
"Most industry observers, however, believe that this time OPEC will be successful in keeping oil prices from falling." Business Week - December 31, 1979
"Responses that might have been sufficient between 1974 and 1979 no longer suffice; today the United States and all the world's importers are caught in an acute and lasting energy emergency." Robert Stobaugh and Daniel Yergin - Foreign Affairs - vol. 58, no. 3 1979
"We must adopt a system of gasoline rationing without delay...in a way that demands a fair sacrifice from all Americans." Senator Edward Kennedy (D-Mass.) - New York Times - January 28, 1980
"I think it [OPEC] has now become such an institutionalized structure that it would be very doubtful that anyone could break it down." President Jimmy Carter - New York Times - February 11, 1979
In the year 2000, the average US Driver drove 2,000 more miles than they did in 1973, but used 200 gallons less gasoline in doing so....due to the advances in fuel efficiency technology in automobiles.
Hybrid Electric and Alternative Fuel Sources are just now emerging in the US...they will only rapidly advance in their efficiency - while simultaneously dropping in their cost to the consumer.
...in the coming decade, this will be an incredibly important factor in the Supply:Demand balance for Oil/Gasoline, just as it was during the prior Oil Shocks that drove the demand for new technologies.
Price drives innovation.
In a free market such as we purport to have in the USA, an Energy Economy when significantly impacted with rising prices, incrementally facilitates substitution of alternative fuels and new technologies. Unfortunately, often Politicians intervene and adopt policies that are not the most efficient, nor the best economic solutions for either the economy, or it's citizenry.
Instead of spending $200 Billion+ to seize control of the Mid-East Oil Fields via our presence in Iraq - along with the countless hundreds of Billions yet to come in the years and decades ahead to maintain the permanent Military Bases and presence we are now building and creating... we could have used the prescious economic resource called TAXPAYER MONEY and much more efficiently and productively (for both the economy and the Taxpayer) invested in "incremental substitution" via investing in and funding New and Alternative Energy Sources that would actually lead to US and North American Energy INDEPENDANCE, such as the Canadian Oil Sands, or merely instituting New Cafe Standards which would accelerate the use of Hybrid Electric Vehicles (and bring down their costs !)....versus maintaining DEPENDANCY on OPEC & Big Oil - while ensuring their windfall profits and the inefficient use of precious resources, not the least of which being - Taxpayer Money and US Military Lives ...
Nevertheless, the ultimate power of the natural laws of economics will prevail, as people tend to buy more at lower prices and buy less at higher prices...while producers tend to produce less at lower prices and produce more at higher prices...hence the ultimate power of Economic Cyclicality in the Oilpatch is ensured.
- it truly is "the price of Oil - Stupid" but, there is also a natural continuation of that Platitude, that being that the Cure for High Oil Prices - is, was and will always be - High Oil Prices....as Oil Producers tend to invest less in Cap Ex, Drill less and produce less at low prices - than they do at high prices.
The Natural Cycle of Economics will prevail over the Hype & Self-Enriching Political Agenda's of this decades Oil Cassandra's... the solution will arrive, it will ultimately matter little if it remains primarialy a Fossil Fuel oriented solution, or an Alternative Fuel, or a New/Emerging Technology... rest assured - the Cure for High Oil Prices - will be High Oil Prices...and it will end as it always ends... with Pigs getting Fat and Hogs getting Slaughtered.
Lookin' forward to the Hog Roast,