Q: How much control does OPEC have over oil prices now?
A: Let me put this into perspective. We view the history of the oil business in three major eras. The first one lasted 100 years, from 1870 to 1970, during which the United States controlled world oil prices. It's interesting to note that over that entire period, on an inflation-adjusted basis in 2004 dollars, the price of oil averaged US$13 a barrel.
That period ended in 1970 because that's when the United States reached peak capacity. For the next 40 years it was an era of transition, with OPEC in control for most of that time. They replaced Texas because they had the only incremental production that could be used to affect market prices.
That era, in our view, came to an end a couple of years ago when total world oil production essentially reached capacity, so it's out of OPEC's hands now.
Q: What does this new era look like?
A: We're now moving rapidly into the new era, which I call an era of scarcity and price rationing. Just as U.S. production reached an all-time peak in 1970, it has now declined 50% since 1970 -- and nothing has been able to reverse this decline.
One by one, the major producing countries have been reaching the same turning point. From this point on, total world crude oil production is going to slowly and irreversibly decline.
However, there's growing production of liquids related to the international gas business, in the form of condensate, liquefied petroleum gas (or LPG) and, toward the end of the next 10 years, increasing production of the synthetics.
That wedge of growing natural gas liquids will roughly offset the decline in oil, so we'll have a stable total world petroleum supply.
Q: How does this view differ from the views of oil producers?
The Department of Energy's official forecast is that world oil production is going to grow 50% over the next 20 to 25 years, from 80 million barrels a day to 120 million barrels a day. Exxon and Shell have essentially the same forecast. We disagree with that completely. We find that most forecasting, no matter who's doing it, is a straight-line extrapolation of the trend most recently experienced -- and that's always wrong.
Q: How much do oil prices depend on the continuing strength of the U.S. and Chinese economies?
They have been very important to it. But we have been forecasting for the past three years that at about this point in time China's growth in oil demand would stop -- and this has turned out to be about right.
They use about six million barrels a day, and about 30% of that is used for transportation fuel. The rest of it is essentially power generation and industrial fuel. About eight years ago, the central government began the largest coal-fired expansion of power generation in all of history. As we sit here today, they're bringing on a new 1,000-megawatt coal-fired power plant every two weeks.
They've had huge electricity shortages over the past seven years. But we estimate that within two years China will have a surplus of electricity. So their transportation fuel use will be growing rapidly, but it will be roughly offset by all these new power plants.
This seems to be arriving at about the same time that we see no increase in oil supply, so that will keep oil from going to US$200 a barrel.
Q: So where is the price of oil headed?
It will hold at US$80 or US$100 a barrel, and still go to US$150 a barrel in the short term.
Who's to argue with energy stocks being a big part of one's portfolio? After all if we end up with $7.00 gal gas wouldn't we want an offset? But why not go with stronger stocks like SM and SPN (EPL for those with gambler instincts- big deep well potential at Denali in GOM)? The merger business with HELX is casting doubts, and if oil prices do ease, even temporarily, the REM acquistion will seem expensive. HELX has simply acted weaker than it's peers within a recently weak sector. That fact that this .33 PEG thing doesnt inspire more confidence casts doubts on it's validity. IMO.
thanks miller........you may be right. I'm a builder, and who knows, I may take on a project down in Mexico if the situation is right.........but not expecting to do so.
Perhaps I might try as you are, to do a consulting type stint to assist some new construction outfits get going in that new area of buildup.
I could see myself sailing for 6 months, and then it WOULD get boring,.....so thanks for the tip.........experience is always worth listening to.
hey mon..........I used to ski in the Poconos......beautiful area, and I can imagine the city folks crowding the place and ruining the serenity of the mountains.
Same thing here in Fla. has occured----------too many "imports" from S. America, Caribbean, Haiti, etc. etc......and too many NY'ers......have ruined the area I found 18 years ago as a quiet, beach town. So, I will trade oceans later this year, and lol in the waters of the Pacific.........where there are miles of unspoiled beaches and the NY'ers haven't found it yet!
I can't remember the name of the ski area in the Poconos I went to, but it was a great place to learn to ski............later moving on to Killington, Vermont for some more radical slopes!
I agree it is weird to see other stocks of companies in the same bidness as HELIX moving up rapidly.........and this poor dog on the ground with rigamortis setting in.......but I just can't switch out and buy into another that I consider overpriced. But the market is always wiser than I. What to do???
As dhedges from the GW board always says..............
Just a thought on retiring at 52. I sold my company and retired at 54, built a great sailboat, went sailing, relaxed, etc. Got damned bored!
Now working again and enjoying it, but on a much more relaxed (solo consulting versus owning/managing a firm) basis. If you are retiring at 52 my bet is you will miss the game and unretire in a few years. If I were you, I would leave the option open.
Lol, I am known to have a fairly weird sense of humor. Young, hmmmm you are about 10 years my junior...so..yep.. young, lol. I believe that we got into this company about the same time.
Sounds like a great move to Mexico. Retired, pretty much so am I. Live in the Pa. Poconos...great to wake up and hear birds, and in the summer tree frogs...not city traffic. Bear, turkeys (the feathered kind), coyotes and Bambii and his/her friends make life interesting. People constantly complain about deer damage, so I remind them of the destruction a moose may do!!!
Unfortunately life is changing. People are flocking out of the cities and bringing traffic and their "crap" with them. Progress... I think not.
In any event, have always enjoyed your posts.
By the way, it looks as though some of the 'whiners' have gone away. As Todd mentioned, we are practing patience..and shall be rewarded.
algoma.............I am 100% in agreement with that article on Canadadian energy holdings..........
I am planning on moving to Mexico in the next few months, and will put a LARGE % of my assets in Canroys...........it's the ONLY country in the world that I would put that much of my net worth in oil investments.
But, I am a contrarian by nature and design.................my investments this past year have gone overseas to world-wide bonds in emerging markets........and into the Japanese stock market. Sometime later this year, I will hold Canadian royalty trust units and live in Mexico..............I am a true contrarian.