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$200 Oil: Before Decade's End, Not Year's

by: Andy Singh August 11, 2008 | about stocks: OIL / UGA / USO    

Andy Singh

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As oil drops below $120, the sense of relief is palpable for most consumers as they see sub $4 gas at he pump. Media headlines have also done an abrupt about turn, with headlines changing from "When will crude hit $200..." to "How fast can prices come down..". The 20% fall this month has many people coming out and saying that the worst is behind us and that we are out the high gas/oil spiral. Some are even taking the rapid drop as a sign that high prices were caused by speculators and a much undervalued US dollar (which has also rallied more than 10% recently).

Oil's certainly not cheap by historical standards, but the $145 and change record of early July begins to resemble an anomaly as it recedes in the rear-view mirror. After all, it has been a quick, jarring ride. Just a year ago, oil futures were changing hands at $72. So even at the current prices, we are still up 70%. Gas prices have risen a more modest, yet as painful, 30% over that time.

The current fall in prices is due to various short term factors. Consumers are drained amid credit and housing woes, and crushing gasoline prices have compelled them to conserve. India, one of the Asian tiger economies and a big consumer of oil, seems to be slowing much faster than expected. A rapidly strengthening dollar is dulling commodities' allure for traders and speculators. The Olympics are creating a sense of world harmony, a weaker than expected tropical storm season and a relatively quiet Iranian agitator-in-chief have calmed portfolio managers and oil traders attuned to weather and geopolitics.

However, we are not out of the woods by any stretch and my view is that high gas prices will return. Why you may ask?

Factors that will contribute to the higher long term energy prices:

- The planet remains in a state of energy stress. Asian countries are adding an estimated 50,000 new cars per day to their roads. Adding this growth plus that from other oil based consumables, will provide a huge demand side effect. With supply limited and growing very slowly, this will lead to a steep rise in prices.

- If China's oil demand growth rate continues at its current pace of 6% to 7% per year, China will use 20 million barrels a day by 2020 - about the same as what the U.S. uses today. And by 2030, China would be up to 40 million barrels per day - twice what America uses now.

- Tensions between Iran and the U.S. and other Middle east countries don't look like abating in the longer term despite recent diplomatic efforts and a lull in tensions.

- We'll drive more, fly more and waste more. As prices fall, the alliance of environmentalists and consumers, brought together by pain at the pump, is already coming apart. When has is below $4, people will think of it as a relief and unfortunately most will go back to their old habits. Holidays that were put off in the summer due to high gas prices, will now be back on the Agenda.

- Renewable energy is still a long way from being a viable alternative to oil in terms of widespread usage. The world economy cannot and will not quickly convert from an oil-based consumer to a blend of other energy options such as natural gas, solar, wind and so on," said Neal Ryan, a manager at Ryan Oil & Gas Partners. "Until we do, I certainly expect oil prices to remain at these elevated levels over $100 a barrel and eventually challenge their all-time highs again -- and then surpass them in the coming year." (Marketwatch.com)

- The recent pull back is an expected market correction. The price can go back up as fast as it fell, particularly if the US dollar (in which the global oil trade is conducted) weakens again on bad credit or economic news. Speculators will come back during any periods of uncertainty or weakness and once again become a factor in high oil prices.

I don't think oil prices will go anywhere near $200 by year end or that gas prices will get to $5. My view is that oil and gas prices will finish the year around $130 and about $4 respectively. However, unlike the 70s energy crisis that went away after a few years, I think the current factors behind high oil prices are more permanent which means we will see $200 oil by the end of this decade. The best way to deal with this is for people to continue gas conservation techniques and habits when $5 gas was expected, rather than forget the lessons learned. The government especially should learn from the recent experience and focus on developing a long term sustainable energy policy that will reduce America's dependence on oil, and hopefully one day eliminate it. That is the only way we will be rid of high energy prices and its adverse impacts.

Disclosure: None

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This article has 15 comments:

  •  
    Aug 11 07:32 AM
    Excellent article !!!! I agree 100% with your conclusions.
    Reply
  •  
    Aug 11 08:22 AM
    I also agree, and am glad I'm not alone in this belief.
    Reply
  •  
    Aug 11 08:54 AM
    Interesting and probably true but of no use to an investor. Im not interested in 10 years from now. Oil is headed down now.
    Reply
  •  
    Aug 11 09:14 AM
    Oil is headed down until end of olympics. The supply has not increased and is not expected to increase meaningfully until end of 2009. So we will see $150-$170 oil this yea.r
    Reply
  •  
    Aug 11 09:19 AM
    What part of "this decade" didn't you understand?

    Yes, oil is headed down. BFD, its still up more than 50% year over year. Yes, both Japan and the Eurozone are weak, both sell more to China than the US and China won't restart its engine until after the Olympics.

    China needs electricity. It no longer exports coal. I guess they will have to make do. Gimme a break.
    Reply
  •  
    Aug 11 09:46 AM
    So many great points are brought up in this article. Very good article!
    Reply
  •  
    Aug 11 10:16 AM
    The addition of 50,000 cars/day in Asia adds about a 10 days equivalent of US oil consumption per year to the demand pool.
    Reply
  •  
    Aug 11 11:26 AM
    $200 before 2010? Okay, so I can wait for a hair over 2 years for an 68% return. This decline while it may be somewhat a speculative wash out,is as much due to the anticipation of interest rate hikes, thatnow don't look like they'll be coming this year. The Fed will absolutely continue to print money for all its bank pals and as a result a dollar inflated oil price is virtually inevitable as the dollar becomes a decidedly unattractive currency at least for a while.
    Reply
  •  
    Aug 11 05:36 PM

    Exceellent article. The comments are even better, except for the confused fellow re: decade.
    Reply
  •  
    Aug 11 07:25 PM
    I hope that Alternative Energy becomes a reality sooner rather than later, but without sky high Oil/gas prices Americans are quick to return to old wasteful habits...

    NatGas, Wind, Solar, Thermal, Hydro etc..... is our future nearterm or longterm?
    Reply
  •  
    Aug 11 07:53 PM
    This article would be correct if all of the assumptions hold true. As with many other oil bulls, the author assumes many things, such as:

    1)China will grow at the rate it has grown the last 5 years. This will not happen. They will contract to some degree, maybe even recess. The 60% drop in their stock market is telling us something.
    2)China has an insatiable appetite for oil at any price. China is very inefficient in converting energy use into GDP, the USA being 4x and Japan being 9x as efficient. Right now, their government is subsidizing energy costs, to what degree is anyones guess. The net effect of this is transferring a portion of their foreign reserves to energy exporters.

    High energy prices will affect China far more than the US or Europe. Manufacturing based economies are more energy intensive. As long as oil and coal prices stay at sustained levels, I believe this stock market will face continued downward pressure.
    3) $4 gas is the magical number where US demand destruction begins. We actually had more demand destruction in the 1st quarter, when gas was far cheaper than that.

    The bulk of the 2nd quarter run up in oil prices was not due to demand exceeding supply, but speculators running up prices. Oil shills like Goldman and Morgan saw to that. In the current economic conditions, oil over $100 is not economically viable. Economic conditions would have to change drastically over the next 2 years for oil to reach $200.
    Reply
  •  
    Aug 12 12:44 AM
    WAR=stronger dollar, but will soon equal higher oil prices as Russian Occupation will force oil distribution to look at alternative methods of delivery, greater shipping rates?

    Meanwhile Solar and Wind are currently lumped with Oil, lower oil means no urgency and no need to escalate installation of said alternatives. This is an idiots way of viewing the respite but thats the way the Herd Mentality works.

    I know because I was once part of that Herd.
    Reply
  •  
    Aug 12 07:40 PM
    China has shut off the "machine" for improved air quality for the olympics. The streets were empty the week before the games started. After August 24th, China will start everything back up and oil will continue going up.

    I wish alternatives weren't linked so tight to oil too. Its ridiculous.
    Reply
  •  
    Aug 12 10:04 PM
    Well, Alex G - got it right! - The Shills were the recent culprits...investigati... reports are under to show this...stay tuned...

    China's car growth means that their Oil use will equal outs by 2020? That is stretch...but, we are assuming that they will only grow going forward using gas guzzlers and inefficient means of production...let's see, we have 5k 'green engineers' in training in the US and they have 200,000...Hmmm...They are quit a wise group in many ways and with a central government that can dictate policy...they will be able to 'implement' green technologies and energy conservation at stunning rates with significant success...Oil will stay in teh $80 range for two years and move up $10 per every two years, unless the Shills who just bought into the Dubai Oil Exchange are not preventive from doing so and if Iran doesn't burp too strongly..
    G
    Reply
  •  
    Aug 13 11:15 AM
    Shame on me cause I haven't done the math but 200,000 greenies is probably relative to our 5k when comparing our population difference and the amount of manufacturing they do. Its not just making cars efficient, its making the process of making cars efficient.

    One thing is for certain, Bush will make sure oil stays above $100 before he leaves. Their pumping the money back in right now, keep your house....so you can pay for your gas guzzler!! The timing is not a coincidence..
    Reply
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