From Alan Abelson's column in this week's Barron's.
November 23, 1998
Up and Down Wall Street, Part 2
Up & Down Wall Street, Part 1
"Historical artifact."
A friend of ours, very wise in the ways of oil, was referring to OPEC, and we think the
description as apt as it is neat. Once, that band of petro brigands had the whole world in its greasy
palm; today, it's just another futile fossil. You can trace its rise and fall with a glance at the
accompanying chart, which depicts the swell and swoon of oil prices since 1970.
In one sense, OPEC was hoist on its own spike. In contriving to push up the price so
precipitously, it inspired a frantic hunt for new deposits of oil and gas and, at the same time, set off
formidable efforts at conservation. Which, of course, is the way markets inevitably work.
But the world was also lucky that this fractious
cartel was mottled with greed, and in the end, all
that the members truly shared were a talent for
spending money they didn't have (which, when the
moola was pouring in, was a real challenge) and an
unshakable conviction that production quotas exist
solely to be exceeded.
However much we envy the technician's unerring
ability to forecast the past, we hold no aspirations to
anointment as a technician. But what strikes us
about the chart is that if one blots out that runup in
late '90, occasioned by fearful anticipation of the
Gulf War, crude has been etching a rather fitful base
since '86. Prices seem to have a floor of around $12
a barrel, tested again last week. And past excursions
to these depths have been precursors to an upturn.
Which, we must concede, isn't what that
aforementioned seasoned energy hand expects. He
thinks oil prices will hover around these levels for
quite a spell, and overall, he's pretty glum on the
more immediate outlook for the industry. A view
possibly colored by the fact that he doesn't know
where his next deal is coming from.
What he espies as he looks through the glass darkly is a stretch, maybe a prolonged one, of capital
deprivation as investors shun an industry that, from the late 'Eighties through last year, was
buoyed by hundreds of billions of fresh equity. He foresees a wave of consolidation thinning out
the ranks of the independents, which more than quadrupled in the dozen years through '97.
There'll be any number of essentially necessitous mergers between more or less equals. But every
now and again, a major energy company will swoop down and scoop up a likely looking addition
for its fold, paying a premium for the privilege. That suggests there's money to be made, if you
happen to latch on to the right producer.
A pragmatic type, our friend is shying away from companies that are primarily crude in favor of
those with generous natural gas exposure, since he likes the prospects for gas (although he isn't
counting on any price explosion). Moreover, despite his pretty dour near-term view for oil, he
notes that things are nowhere near as bleak as they were in 1986, when supply far exceeded
demand; by contrast, currently, on a consumption base of 73 million barrels a day, the excessive
supply amounts to four million barrels, hardly a huge overhang.
Along with the investor flight and compression of the number of operators cited by our petro pal,
other trends, such as a fairly sharp drop in domestic drilling activity and curtailment of capital
spending, suggest that a remedial process is firmly under way in the oil patch. How long before it
starts to have a meaningful effect can be answered unequivocally -- but not by us. Our own
cowardly reply to that critical question is -- who knows?
But given the combustive nature of the stock market these days and the hot eagerness of the
frenetic market movers to look across the longest valley if they feign to see even a hint of a grassy
knoll on the other side, oil stocks are a cinch to anticipate better times long before there's any sign
that times are getting better. Especially since those stocks are so deep in the investment doghouse.
Whether it's time to buy the oils depends on the condition of your stomach and how well you
tolerate pain. But it's certainly time to start prospecting for possible buys, since, as we say, the
signs are clear that a cure for what ails the industry is very much in the works. And for investors
whose lips get tired even reading signs, there's the chart and its intriguing message.
To state the obvious, the collapse of Asia clearly has been a serious depressant to global demand
for oil. And we wouldn't bank too heavily on a pickup from that source any time soon. That
doesn't prevent oil folk like our friend from dreaming of the impact were China to step up its
meager per-capita consumption of petroleum.
Right now, the average Chinese citizen uses up 1.3 barrels a year of oil, compared with an annual
average 25 barrels used by the energetic inhabitants of our great country. One needn't postulate a
twentyfold jump in Chinese gas guzzling, but merely a modest increase in consumption, to
envision that four-million-barrel-a-day surplus evaporating overnight and prices spiraling upward.
Which raises the inescapable question: Why don't Exxon, Mobil, Arco et al. get off their butts and
do the right thing? The right thing plainly is to get millions of Chinese to swap their bicycles for
cars. And the way to do that is equally plain: Let Big Oil chip in to a car-kitty, buy millions of
Chevys, Fords and Chryslers and hand them out gratis to carless Chinese. Sure, the investment
would be big. But man, the payback would be staggering.
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