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Drilling Deeper Into the Oil Crisis

by Mick Weinstein

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Posted on Friday, May 23, 2008, 12:00AM
With oil prices spiking to more than $135 a barrel this week and having doubled over the past year, all discussion of where capital markets are headed seems focused on black gold. As bond expert blogger John Jansen put it, "In the near term, oil will remain the critical headwind against which all markets will labor."

This week, market bloggers provided terrific insight into what's responsible for the run-up in oil price, how long it's likely to last, and how an individual might invest in oil at these peaks. As always, click through for the full articles:

How Did This Happen?

Fundamentals: Many blame market speculators for artificially jacking up the oil price, but macroeconomist James Hamilton lays out a compelling case that market fundamentals really are the primary driver. While the world's developed economies "consume a disproportionate share of the world's energy," developing Asia and the Middle East account for the recent rapid growth in demand. "So yes, I do believe that speculation has played a role in the oil price increases, particularly what we've observed the last few months," says Hamilton. "But it's a big mistake to conclude that speculation is the most important part of the longer run trend we've been seeing."

OPEC: Yves Smith at Naked Capitalist, in a careful critique of an International Energy Agency report, sees the oil producing nations as a key factor in the oil price spike: "[I]f I were an OPEC member, I'd have every reason to foster the Peak Oil story, which undoubtedly is generally accurate, the question is how immediate. Second, I would not pump more if I could, or would make only token supply increases. Indeed, I'd be trying to restrict supply without looking like I was doing so, which makes the Iraq war and supply disruptions godsends. Put it more simply, the Saudis have every reason to leave their inventory in the ground," given various U.S. issues with the Saudis, Iraqis and Iranians.

It isn't OPEC's fault, says Ken Bell. "We think the oil just bubbles out of the ground" in OPEC countries. "The easy oil has been discovered. There is plenty of other oil still out there, but it's expensive to find and develop. It will take a high oil price to make this exploration and development economically viable, so trying to constrain oil prices isn't going to be encouraging the development of additional supply. As for our government, if they want to sue someone over price gouging, maybe they should go after Starbucks (SBUX). The price of my Venti mocha works out to about $1,075 per gallon. Keep that in mind the next time you're filling up your tank."

High rollers and Big Media: Trader Phil Davis disagrees however, and believes fundamentals - from the demand side or the supply side - are not the primarily driver of the ongoing rise in oil prices. Davis finds fault with big media for promoting a myth of scarcity to the benefit of big traders: "This 2M barrel a day shortfall does indeed sound shocking until you realize that what's really shocking is that it's repeated on CNBC two or three times a day and not once does a "newsperson" point out that both OPEC and the Oil Companies... say this is patently untrue. Also, wouldn't common sense suggest that if we were short 730M barrels a year that someone might have noticed it? This isn't just a lie, it's a massive fabrication aimed at inciting panic of a very profitable nature for energy traders and [CNBC] guests."

Washington: ETF expert David Fry is exasperated "regarding the lack of any energy policy in the U.S. since the first oil embargo in 1973. I mean, c'mon - 34 years of no action! No drilling off any coast anymore [thank you Nancy, Jeb & Co.], don't touch ANWR [thank you Dems], no nuke plants in our backyard [thank you Jane], no wind farms near Cape Cod [thank you Ted] and no more fossil fuels at all [thank you Al]. In the meantime, strategic interests owing to our own shortsightedness have us at war for the stuff [thank you George I and II]."

U.S. Michigan economist Mark Perry concurs that if we want lower gas prices, it's time to open up "access to plentiful oil and natural gas deposits beneath federal lands and U.S. coastal waters."

But economist William Ellard is peeved by politicians who claim sky-high oil prices are due to a lack of new supply in the U.S. "You can't dig yourself out of this scarce resource pricing issue. One needs to let economics work: prices need to continue to rise, until demand falls and alternatives are properly funded...The U.S. oil fueled economy is old and tired. A new vibrant U.S. economy is coming - if we start real investing in all the oil alternative technologies."

Whatever the source of the price jump, Bespoke Investment Group provides a remarkable news-overlay chart of oil since 1990 and concludes "it would be hard to draw a more vertical line since oil hit a low of $50.48 in January 2007.

Goldman Sachs analyst Arjun Murti, who has been spot-on quarter after quarter in predicting this big jump, recently predicted $200-a-barrel oil in the near future. Research Recap takes a closer look at Murti's call alongside others who believe a "super spike" to these levels is altogether possible.

San Antonio investment manager Frank Holmes, however, believes "oil is currently overbought and due for a short-term correction of $20 to $35 before resuming a longer-term price climb that could well reach $200 per barrel."

Brian Davis says the U.S. is a nation of "oil addicts. We cannot kick the habit." As a result, America will either start conserving resources or "let the oil addiction kill us. As an investor, it is critical to take advantage of the situation at hand. Look for a continued rise in oil prices."

How are Investors Responding?

John Jansen believes that traders and investors rushing into oil now is simply "the minnows rushing to the shallow waters." Given the huge run-up, "this does not seem to be the proper place to be establishing new long positions. The recent price action smacks of panicked short covering as well as the entrance into the market of those chasing the latest hot trend."

Portfolio manager Roger Nusbaum reduced his clients' exposure to an oil stock during this week's big spike.

Bespoke shows that the leveraged oil price ETFs - which move at twice the price of oil, up or down - saw big jumps in volume this week, as institutional and individual investors became more active in these funds.

While it may be tempting to short oil at this stage, Investor Sajal has some words of caution from the historical record.

If you think oil prices will just continue to rise - or if you simply want to hedge your growing gasoline costs, Hard Asset Investor describes two ETFs that allow individual investors to capture an ongoing runup.

William Ellard provides his top stock picks as we head into 'peak oil economics.'

Alternative energy stocks are another way that some investors are playing oil's runup, as these names tend to gain in value as traditional, carbon-based energy sources rise in price. Bespoke takes a close look at one exchange traded fund that holds a basket of green energy stocks.

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76 Comments

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  • MahfoudL - Sunday, June 1, 2008, 11:25AM ET  Report Abuse

    • Overall: 1/5

    Why does Yahoo keep this yahoo Mick Weinstein around? Lets follow his math. A gallon is 128 ounces. A venti at starbucks is 20 ounces. So it would take 6.4 (say 7) venti mochas to equal a gallon of mocha. Each venti mocha is somewhere around $5. So a gallon of venti mocha is 7 times 5, or $35. He comes up with $1075. This guy has absolutely no common sense if he doesn’t question a value like $1075. Never, I mean NEVER, take financial advice from someone that is all talk and no sense.

  • Rick - Friday, May 30, 2008, 10:53AM ET  Report Abuse

    • Overall: 3/5

    I like this article in the sense that it is very informative, putting a lot of different investors/analysts' opinions out there in one place... but really all it has done for me is reaffirm my belief that no one has any concrete proof or even an idea of what is driving up the price of oil and this point is proven ten fold by the numerous contradictory opinions of all these "experts." I won't bother stating my opinion, since I'm no "expert" and even if I was, there would be 14 other immediate contradictory opinion responses. No matter what the cause of the price increase is, one thing is obvious to me: It's time to invest in non-oil-based energy sources in this country, not only to help the consumer but to bring the $ from its knees against the rest of the world. We think of ourselves as the world's foremost superpower (for now), but how dominant can we be in a global market where our chief source of energy is supplied predominantly by other countries? Time to get self-sufficient. Not isolated, but not dependant either.

  • Yahoo! Finance User - Thursday, May 29, 2008, 9:28PM ET  Report Abuse

    • Overall: 1/5

    Rehashing other people's work is garbage at best and stealing at worst.

  • JOel - Thursday, May 29, 2008, 11:15AM ET  Report Abuse

    • Overall: 3/5

    Please answer these two questions. The year over year increase in oil for world demand is two percent per year. If the increase in demand is twenty per percent how come the price per barrel is up seven hundred percent? Or during the 2007 Hurricane season the Hurricane forecast was for twelve hurricanes to hit the continental US. In fact one did! The price of a barrel of oil spiked in one momth from fouty dollars a barrel to seventy. In late September the forecast was changed to one hurricane. How come the price of a barrel did fall in fact it continued to climb? The markets reaction was inaccurate and based on the current climate and does not correct! Supply and demand does not explain the price. In reality little has changed.

  • Kim - Thursday, May 29, 2008, 10:57AM ET  Report Abuse

    • Overall: 3/5

    The truth is, nobody is really sure of whats hapenning in the oil market.

  • Murfdigidy - Thursday, May 29, 2008, 10:38AM ET  Report Abuse

    • Overall: 5/5

    Well informed and well rounded article. This was informative and unbiased. I wish I could read more articles like this and less of that pompous self promoting dink Robert Kiyosaki.

  • ACE - Thursday, May 29, 2008, 7:46AM ET  Report Abuse

    • Overall: 2/5

    Go to your favorite search engine and punch in "peak oil".That will explain whats going on.Dont listen to the media.

  • Shelby - Wednesday, May 28, 2008, 7:25PM ET  Report Abuse

    • Overall: 5/5

    Excellent article and blog site ... I will be back often.

  • Scott - Wednesday, May 28, 2008, 12:41PM ET  Report Abuse

    • Overall: 3/5

    I wouldn't want "idontknowjack" touching my money either. 1 Gallon = 128 oz, so 20 oz. per venti at $4 is 128oz/20oz = 6.4 ventis * $4 = $25.60...if you're going to comment on someone's math, then make sure yours is right! Overall a decent article...not great, but not bad.

  • Rob K - Wednesday, May 28, 2008, 8:28AM ET  Report Abuse

    • Overall: 4/5

    High gas prices are no fun. However, it is true that this is just what we need in order to get long term solutions. Ultimately, markets do work, but the adjustment time can be painful. Ten years from now, I wouldn't be surprised to see oil at less than $20 per barrel.

  • Cubert - Wednesday, May 28, 2008, 12:31AM ET  Report Abuse

    • Overall: 4/5

    There are so many layers to the oil problems and this is this first article I've seen that covers most of the important factors. Personally I have a nagging suspicion that the OPEC countries, with their vast amount of monies, are hedging into the futures market - especially with the cheap and inflated dollars that they have accumulated. What is to keep a group of Saudi princes from solely driving up the prices? Does anyone have the ability to tack the true origins of futures markets? Could we be seeing the front of a new economic terrorism which we cannot understand nor control?

  • Yahoo! Finance User - Tuesday, May 27, 2008, 10:59PM ET  Report Abuse

    • Overall: 4/5

    The person below making the comment about $1075 per gallon Starbucks is right. The author of the article meant to say that a "barrel" of Starbucks is $1075. As much as I hate it, $4 plus is the right price for gasoline in 2008. It really does cut into how I use the stuff when it costs that much, but I (me) really should not be wasting it like I did for such a long time. You, gentle reader, on the other hand, are able to use it how you see fit - but you still have to pay $4.

  • Love2Fly - Tuesday, May 27, 2008, 10:24PM ET  Report Abuse

    • Overall: 3/5

    I'm actually in favor of higher gas prices: 1) There will be less SUV's blocking my view when trying to make a turn in my compact car. 2) It will help develop new technology for alternative energy source for automobiles. It is time we move on, we have been using the extremely poor efficient combustion engine for too long!!

  • JK - Tuesday, May 27, 2008, 9:04PM ET  Report Abuse

    • Overall: 1/5

    Wow... Venti = 20 fl.oz. Gallon = 160 fl.oz. 8 Venti's = 1 gallon. Your Venti Mocha @ $4.00 a pop is actually $32.... Wow, I wouldn't want that guy touching MY money... Btw, energy/gas subsidies (mostly emerging markets), OPEC, falling dollar (US debt and policies), increased raw material costs (monopolies for other commodities), and increasing cost of marginal supply are the main causes for rising oil.

  • Yahoo! Finance User - Tuesday, May 27, 2008, 4:31PM ET  Report Abuse

    • Overall: 2/5

    Though I like the commentary from various people, this reads like a poorly cited 8th grade research report.

  • Yahoo! Finance User - Tuesday, May 27, 2008, 1:33PM ET  Report Abuse

    • Overall: 3/5

    Waaah! I'm going to have to sell my Expedition and my kids are going to have to learn to share a seat in the Accord. BooHoo! I'll have to sell my 3600 sq ft house and make my kids share bedrooms! What about those weekend flights to Vegas? No more? How will I ever be able to afford my Crappacinno?? .... Harumph! We STILL haven't come anywhere near the price where people will choose to walk instead of drive. Even at $25 / gallon, IT STILL BEATS WALKING!! Get over it America.

  • Jet - Tuesday, May 27, 2008, 1:30PM ET  Report Abuse

    • Overall: 2/5

    In the blog rehash, he seemed to forget the biggest factor -- no confidence in the US dollar. The oil producing countries are swimming the feds dollar printing blitz. As the fed continues to expand the money supply at better than 10% a year, commodities are sky rocketing. The only reason why all the finished goods aren't going as well is that China wants to get some more screws in before they crash our party. The gov't has reported inflation in the 2-4% range for years while the reality is that inflation is running near 10% and has been for years. That and debt are what are killing the US and making oil and gold so expensive.

  • GP - Tuesday, May 27, 2008, 1:11PM ET  Report Abuse

    • Overall: 3/5

    I've never really understood the point of this article. Collecting other's opinions and putting them on a page doesn't seem like expert material. If he used this stuff to supplement his own ideas, it might be interesting. I also don't know how figures $1075/gallon at Starbucks. If the size of this "Venti mocha" -- I don't know their sizes -- is 8 ounces, that means he's paying $67 for a drink. If it is 1 ounce, he's paying $8.40 for the sip. Either way, he is quite stupid in his math or his willing to pay. In the meantime, the best thing the US gov't can do is to put a $5 tax on a gallon of gas (and the equivalent on other fossil fuels and imported goods produced with fossil fuels) and offset that cost with a income tax discount. While it would be revenue neutral for consumers, it would encourage conservation and alternatives much better than the insane Ethanol and other subsidies.

  • Yahoo! Finance User - Tuesday, May 27, 2008, 12:38PM ET  Report Abuse

    • Overall: 1/5

    Nothing new in his article/blog. We all know what the problem is: From the first oil well drilled we began running out of oil. Oil does not renew. Supply and demand. What more is there?

  • Manoj - Friday, May 23, 2008, 7:03PM ET  Report Abuse

    • Overall: 2/5

    Oil is in demand, by investors for returns and for consumption by India, China and other nations. However, this doesn;t explain the increase in total. There are other factors too. Dollar is down and the supply is the same. This is also a bubble. It will come down. hard to believe all that but most probably it will happen. There is no guarentee in market. Smart people sense early, buy early and get out early. Dumb ( the majority) see later and get burned. The classic example is real estate. Common sense is much more important than expert's advice. Remember that.

  • Inder Kumar Garg - Friday, May 23, 2008, 6:20PM ET  Report Abuse

    • Overall: 4/5

    If it is so much a case of fundamentals, and supply matching demand at a particular price level, why so many people (particularly economists and policymakers) couldn’t see this price spike coming? There are some long-term issues and some short-term. We need to segregate the two for a proper perspective on the issue. The role of Big Oil can also not be stifled. How come big oil is raking up big profits at the same time when gas price is racing up? Then there are the speculators and the OPEC. Of course, India and China are now equal partners in the use of oil and gas. Inder Kumar Garg

  • Yahoo! Finance User - Friday, May 23, 2008, 6:11PM ET  Report Abuse

    • Overall: 3/5

    It’s Not an Oil Crisis, It’s a Dollar Crisis. Everybody including Mick Weinstein is missing the whole point. It would be a oil crisis if you had to drive to 10 gas stations and found gas in 1, and 9 to be dry, YES!!!!!!! then it would be a oil crisis. There is no oil crisis, it is a $$$$$$$$$ crisis.The collective belt tightening is simply the down payment on the Government’s massive bailout of Wall Street investment banks and mortgage lenders. As the Goverment prints more money to buy bad mortgages and other shaky securities held by banks and brokerage firms, the value of the savings and wages of everyone on Main Street will continue to fall. As a result, the costs of products previously taken for granted have begun to bite.The various housing bills and stimulus packages now passing through Congress will add significantly to the staggering final price tag. In the end, the “free lunch” currently being dished out by Washington will be the most expensive meal ever served. The cost will be borne by ordinary Americans citizens every time they open their wallets. Four dollar gasoline is just the beginning. The whole system is/will come apart at the seams. The train has left the station, there is no stopping it now.

  • Eric J - Friday, May 23, 2008, 5:56PM ET  Report Abuse

    • Overall: 5/5

    Actually enjoyed reading this blog summary, perhaps as expert as the PhD. guy. At least in summarizing the blogoshpere, Well done Mick

  • Yahoo! Finance User - Friday, May 23, 2008, 5:41PM ET  Report Abuse

    • Overall: 5/5

    I like this one-topic format much better. This is still a peculiar article. But I think Mick is getting close to a good format.

  • looneytarian - Friday, May 23, 2008, 5:22PM ET  Report Abuse

    • Overall: 3/5

    Very surprised, not only at the decent article but in the fact that there aren't a million boneheads blaming it all on Big Oil and Bush (yet). I have to admit that I played with the idea that OPEC was monkeying around to see what they could do to our economy. Had to dismiss it because if they succeed in destabalizing US's economy, then the global economy would probably follow and OPEC would probably collapse with it. It doesn't appear to be supply and demand, plenty of demand and OPEC says they can produce more if needed. That leaves the weak dollar and speculation and it is probably a combination of both. There is probably more to it than that, but regardless, there isn't going to be a quick fix. Even if US were allowed to tap it's own deposits, it will still take time to get the process going, though just starting on it may bring speculation under control. I don't know as going into the Strategic Reserves would help, and even if it would, I don't know as I would agree with using the reserves just to get consumers cheaper gas.

  • L - Friday, May 23, 2008, 5:15PM ET  Report Abuse

    • Overall: 3/5

    In a free market, its all about basic economics of supply and demand. The more we "demand" something, the more the price will continue to grow. Sure there are other factors like taxation, tariffs, etc ....but if we continue to drive big SUV's and not reduce our "world" consumption, the price will continue to grow. If our country is serious about economic growth, we need to become world leaders in alternative energy sources. THIS is the new industry and the winners will benefit greatly

  • Yahoo! Finance User - Friday, May 23, 2008, 5:00PM ET  Report Abuse

    • Overall: 3/5

    I think the speculation has a lot to do with this. What do you think the investment banks are doing with all this money the fed is loaning them? Lending it to people with distressed home loans? HA! They're putting the money into the commodity markets. They're giving us the business muti-ways.

  • Nemo - Friday, May 23, 2008, 4:41PM ET  Report Abuse

    • Overall: 5/5

    Yeah, some people want to regulate prices. Big mistake. But maybe Joltin' Joe Lieberman (the nation's biggest turncoat!) is right about limiting some investments in oil right now. He would do so because some people are unable to pay for their gas (wahhhh !!! that'll teach 'em to buy SUVs and big trucks!) which is a typical political lie. The real reason we need to watch investments in commodities is the same reason we should've monitored investments in subprime mortgages, and this country can't afford to bail out banks & other investment institutions caught in two bubbles at once. Beware of bubbles!

  • Midlantic Plumbing, Heating & Cooling - Friday, May 23, 2008, 4:17PM ET  Report Abuse

    • Overall: 2/5

    It's hard to believe that some commets here are actually suggesting "regulating" the price of oil and gasoline?? LOL. Spme people don't even remember history of only 30 years ago. it was goverment regulation that created the oil "shortage" of the 70's. As soon as oil was deregulated the refining began again. Those who don't remember the past are condemed to repeat it. Regulation in any industry has down sides, but in energy, it can be disasterous. We need to drill where ever we have to and recover our own natural resourses.

  • Yahoo! Finance User - Friday, May 23, 2008, 4:08PM ET  Report Abuse

    • Overall: 5/5

    Not from Omaha. Just a nickname during my tenure in the Marine Corps. Series 7? Yes, a joke. I actually love your school, shame you're not representing it. Try passing all three levels of the CFA exam on the first try. I myself, did. Come to think of it, I doubt you went to Georgetown. No man trained in a school run by Jesuits would be bragging about their net worth to a man they don't know on Yahoo finance. Am I wrong? No. As far as speculation is concerned, you may be right. However, if markets are half way efficient, and there is indeed speculation; then yes, we have a bubble. If the smart money isn't shorting oil right now, I doubt the bubble is there.

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