Ed, excellent post.
Read the Barrons yesterday with great interest. I quit buying Barrons on a regular basis some time ago as I simply didn't have the time to digest every copy. But I made an exception for the oil news.
What is more revealing are the comments made outside of the investment press regarding oil supplies. NY Times featured another article on what might be done to increase supply. Some thought being given to using the SPR to increase supply for a while anyway. I think people are still in a collective state of denial on the true state of affairs in the oil patch. But this thing is slowly worming its way into everyone's thinking. Everyone is hoping the jump in heating oil is a fluke due to local conditions, cold winter, transitory market conditions, etc. Some oil analysts are saying this is just a blip and we will see $15 oil by the summer.
The strike in Venezuela may be just the face saving device for Mexico and others for increasing oil supply. Do you think there is enough spare capacity in the world to cover the loss of a major producer like Venezuela, even for a while?
Just speculating of course. It could be just a random event in the oil world and will be forgotten within a few months.
Another interesting phenomenon is the attention the next OPEC meeting is getting. Everyone keeps talking about how now is different than '73, we are much more efficient, energy from oil takes up a smaller portion of each dollar of production in the US, etc. If so, why all the attention? Why not just let those folks set whatever levels they want for production? We can handle it, right?
What everyone seems to forget is that while oil takes up a proportionately smaller chuck of each dollar of our economy, our economy is much larger than in '73. And so is the world economy. When reviewing my last copy of The Economist, I noticed the GDP growth numbers are all up for every single country, with the exception of Japan. This is a different world than we had back in 1973, but we still need the oil.
One analyst said everyone is hoping for a 10% increase in production. Even if we get that, the same analyst said to expect at least $32 in the near term. If we get smaller increases, expect $40.
I don't know what is going to happen March 27. I do know everyone involved will make decisions in their own countries' interest, as nations always have. The US has given up control of its own energy future, leaving it in the hands of others. No one wants to step up and tell people the only solution is to accept some moderate pain in the short term, higher taxes on gasoline and other forms of energy, to avoid some really serious pain in the long term. One way or the other, energy use will be resolved in the marketplace and there is going to be a lot of yelling and screaming when it happens.
Certainly in the next few years it won't matter what OPEC does or doesn't do. Cheap oil will be a thing of the past. Even if they're the best buddies in the whole wide world, no one will be able to pump it out fast enough to meet world demand.
My only question is: are we going to see the start of this in the next few months? Or will we have to wait a couple of years?
It's going to be an interesting six weeks.
Regards,
Jack Simmons |
