Any time I write about investing, I always stress the long-term. Short-term fluctuations don’t drive my investment decisions. I try to see 5 or 10 years into the future, and position myself accordingly. This is a big part of why I started to shift money into oil beginning in 2002; I felt like I could see the supply/demand handwriting on the wall.
My long-term strategy is why I don’t get too excited about oil shooting to $147 or correcting back to below $100. The only question for me is “Will oil be higher or lower in 5 years?” At no point since 2002 have I felt like the answer to that question is “Lower.” I can’t see any combination of alternatives making a serious dent in our consumption until prices are much higher. How much higher? Well, in the Netherlands this summer they were paying $10/gallon for gasoline. Sure, that’s mostly taxes, but consumers were still willing to pay over $400/bbl and alternatives didn’t ride in to the rescue.
Don’t get me wrong, I think alternatives can ride to the rescue – just not until much higher prices force people to cut way back on consumption. As I told someone yesterday, I could make the U.S. energy independent in 10 years. It’s just that it would be very painful. I may have to make oil prices rise to north of $500/bbl.
This morning I saw an article that laid out 5 reasons why the author felt like oil is headed toward $250/bbl:
Unless I overlooked it, the author doesn’t give a timeframe, but I can see oil at $250 in less than 5 years. Here are the reasons the author provides:
First, global oil demand is still accelerating and, according to the United States Energy Information Administration (EIA), will reach more than 115 million barrels per day by 2030 – even with conservation efforts and high prices stunting demand.
Second, daily production has probably peaked right now at nearly 90 million barrels a day, or will peak in a few years at the very latest. While experts once debated the reality of the “Peak Oil” concept, they now accept it and only question when it will take hold.
Third, the world’s fastest growing economies, China and India, are still increasing consumption at double-digit rates, and that more than offsets any conservation efforts that are under way elsewhere around the world. And their governments want to buy oil at any cost – even if that means there’s none left for us.
Fourth, the world will learn one day – probably sooner rather than later – that Saudi Arabia’s vaunted reserves are nowhere near what it claims them to be, and those reserves are certainly not at the levels long held as “gospel” in the oil business. Matthew Simmons, chairman of the Houston-based investment bankSimmons & Co. International and author of the seminal 2005 book, “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” has been most vocal about this alleged shortfall, and I respect his work, especially since I’ve spoken behind closed doors with several OPEC figures who privately acknowledged that this may be their worst nightmare. Simmons recently predicted that oil prices would rally to $500 a barrel.
Fifth, Bailout Ben has dropped trillions into the system to stabilize the Wall Street while Paulson has broken out his bazooka which suggests that as much of 95% or more of oil’s price drop can be attributed to nothing more than the dollar’s rise since July. Nothing else has changed.
I put a lot of emphasis on the first two reasons above. As readers know from my ‘peak lite‘ arguments, I think long-term supply will lag demand growth, and it is only a matter of time before supplies start to decline. What we don’t consume in the U.S. is going to be consumed by developing 3rd world countries.
As I told someone last week at the ASPO conference, the future is uncertain. There will be Black Swan. But we have to plan based on best guesses for what lies ahead, and I am still betting on oil headed higher long-term.