This is one of the "free newsletters" I receive. You folks may have a different take onthings (I do) than the author. Would be interested in thread comments.
SG
Goodbye, Hubbert Peak Oil: The cyclical downturn of oil prices
Those predicting $30/barrel oil (and cheaper!) now find themselves in good company
by Andrew Mickey, BreakAway Investor
The first time I uttered “$30 oil,” all I heard was a few snickering comments and references to the Hubbert Peak Oil Theory. But after five months of research, phone calls and impatiently waiting in airports, I’m done. Everything I’ve come across over that time points to oil prices heading downward over the long term. Rest assured, by 2009, oil will be back to $30.
But all of a sudden, I find myself in good company. Steve Forbes, Cambridge Energy Research, Citigroup, and a bunch of top economists are starting to get on board with me. In fact, Kenneth S. Rogoff, a professor of economics at Harvard University, tries to do me one better: “I predict that we will see at least one period of $20 oil at some point over the next ten years.”
But he’s just one of the many converts. I’ll get to that in a second. First, I have to address Hubbert’s Peak Oil Theory, which Dr. Mark Hubbert created in 1954. Recently, Cambridge Energy Research Associates (CERA), the top oil-industry consultancy group, categorically disproved the myth of peak oil and Dr. Hubbert’s theory.
In a report titled “Why the Peak Oil Theory Falls Down,” CERA successfully dispelled any remaining evidence that the world has crested peak oil. CERA states the remaining oil-resource base is about 3.74 trillion barrels, including estimates of oil yet to be discovered. As a result, peak oil is 20 years off.
To put 3.74 trillion barrels of oil in perspective, consider that the world has consumed a mere 1.08 trillion barrels of oil to date in the past 100 years. At current global consumption rates of about 30 billion barrels per year and a very generous assumption of 5% annual growth in oil consumption, that leaves us with 97-year supply of oil, according to CERA.
So who’s right? CERA is the absolute authority on oil. The consultant is the leading advisor to international energy companies, governments, financial institutions and technology providers.
In the energy industry, when you have a question about oil, you turn to CERA. We’ve got two options: You can listen to a guy that developed a theory more than 50 years ago or to the top energy consultant in the world. It’s your choice.
Another reason oil prices are headed for a fall is due to the financial institutions that are responsible for a large part of the rise and the volatility over the past six months in oil prices.
Today, there are more than 500 energy funds that are buying up oil on the open market. They have no use for it other than that they hope it goes up and down, and their traders are positioned properly to trade the swings in price. A hedge fund manager can’t take delivery of 100,000 barrels of oil in his Stamford, Connecticut high-rise; he’s just in it to trade.
Oil prices have very little to do with supply and demand. After all, have you not been able to get heating oil for your house this year or visited a gas station that was out of gas?
Twenty years ago, oil producers sold their oil and petroleum-based fuels directly to customers like airlines, trucking companies and manufacturers, and the few hedge funds and smaller trading departments at the banks left the oil market alone.
And there’s nothing wrong with that, but their activity is just adding an additional layer of demand to oil prices. As of right now, there’s an additional $70 billion to $150 billion of speculative capital chasing oil prices up and down.
As long as oil prices move somewhere, they’ll be making money. That’s why, when OPEC announces a production cut, oil prices fall and, when oil inventories decline, oil prices rise. It all depends on where the money is flowing.
And now, those hedge funds and trading departments control oil prices. And just like the dot-coms, gold, silver and dozens of other trading vehicles of the speculative community, when they move out, they move out fast. And it’s the individual investors that are left holding the bag.
They’ve already started to see the end coming. Andrew Safran, head of Citigroup’s energy, power and chemicals business, says, “Prices will trade in the $40 to $60 range in the coming years.”
Philip Verleger, an oil economist who’s gained a reputation for early warnings on oil-price swings, says, “If pension funds decide they don’t want to take the risk anymore and bail out, we could see prices go a hell of a lot lower; I think prices could dip below $30. It really depends on what these pension funds do.”
With as much as $150 billion in speculative capital pushing around oil prices, once the rest of the financial community turns bearish on oil the resulting oil bust will be hard and swift. |
