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Reasons to Love 3-Digit Oil

by: Marc Courtenay June 18, 2008 | about stocks: BP / COP / DBO / F / GM / HMC / OIL / PBR / TM / USO / XLE / XOM    

Marc Courtenay

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We recently had the displeasure of having to driving around the freeways of southern California. Some of the more congested ones like the 405 and the 101 have 6 or 8 lanes of traffic, and at rush hour they are all clogged with mostly single-driver cars.

Yet this time there was a noticeable difference. Drivers seemed to be driving more slowly and the speed demons were fewer in number. There were fewer pick-up trucks and enormous SUVs.

The price of gasoline in LA and Orange Counties is pretty close to $5 a gallon, and it is beginning to affect driving habits. I heard a number of people and radio shows talking about cutting back on the number of needles trips in their automobiles.

People are beginning to talk about "car-pooling" again (for the first time in 25 years) and the buses and metro-trains are jammed full with riders who don't want to pay for expensive gasoline. As I predicted, Americans won't become diligent about conservation until it costs them dearly.

One of my mentors, Dr. Stephen Leeb who writes The Complete Investor recently sent me this observation from an international trip he just returned from and it certainly makes the case for us all getting used to expensive oil.

It seems clear to us that if oil were to rise much higher than $150 a barrel, its impact on the world economy would be severe. Probably, growth would short-circuit.

On the other hand, if oil prices fell back under $100 (as most drivers currently pray), everyone might breathe a sign of relief. But that relief would be short-lived.

Cheap oil now would only discourage new oil projects from coming online. It would put serious alternative energy development on hold. In the long run, energy would become even scarcer and more expensive.

When I was at the energy conference in Rio, a couple of weeks ago, one place we visited was the Petrobras facility. Petrobras, as you should know by now, is a Brazilian oil producer. In fact, it is the fastest growing major oil producer in the world, and the 2nd largest after Exxon Mobil, in terms of market capitalization.

Petrobras (NYSE:PBR) made headlines in recent months when it announced potential production of tens of billions of barrels of oil from deposits located five miles under the ocean, and under a further mile or so of heavy salt that constitutes the ocean floor. Wall Street analysts were less optimistic. Some suggested Petrobras would be lucky to extract one billion barrels of oil. Bringing this oil to the surface represents an enormous challenge from an engineering and geological standpoint.

The morning we visited Petrobras, Bloomberg reported that the company plans to spend more than ¼ trillion dollars to develop this reserve. Even if the company is lucky enough to pump two billion barrels of oil, oil prices would have to be above $120 before Petrobras could cover its costs. Add a fair profit to that, and oil prices would probably need to be closer to $200.

Developers of this sort of project face a clear dilemma. If oil were to fall back to near $100 and remain there, deposits like this would not be profitable and will not be developed. The world would then be in greater danger from growing oil shortages.

On the other hand, if oil prices rose to $240, another set of risks takes over. When Petrobras' estimated it would cost a quarter trillion dollars to develop this oil field, it assumed oil prices would be closer to where they are today. But what everyone forgets is that oil prices add to the cost of producing all commodities. Oil at $240 would drive Petrobras' costs for materials and energy considerably higher, possibly making this project unaffordable.

Frankly, we hope oil prices decline a little from their current heights in the mid $130s -- perhaps to $110 or $120 -- and stay there for a while. We would be less troubled by dreams of an immanent economic disaster.

At the same time, we don't want oil to remain stable so long that the world becomes even more complacent about the energy squeeze. Even at today's high prices, people aren't nearly worried enough about oil.

Much has been made over the fact that Americans have cut back a little on gasoline consumption. Sure, some people are driving less due to high gas prices, but not most people. What's more, while oil consumption is down year-over-year, so is supply. And, unfortunately, supply has fallen faster than demand. So we are less secure, rather than more.

Besides, conservation alone will not ultimately solve the energy problem. It will take strong leadership and a vast amount of research and investment to do that.

So this is a big part of the "mandate" that we the people need to give to the politicians now and this November. We must let them know that we aren't going to tolerate more of the same mindless leadership that is unwilling to formulate a national energy policy that doesn't emphasis the importance of sustainable energy.

If you want to see a dramatic illustration of what lack of planning and preparation in the energy patch can lead to and how badly the consumer is penalized by government's ineptness to create and maintain a successful energy policy, look at the 1 year chart below for oil future.


Closing Crude Oil Futures Price

We ought to be telling the American auto companies, especially General Motors (NYSE:GM) an Ford (NYSE:F) that we want to be at least as good as Toyota (NYSE:TM) and Honda (NYSE:HMC) in creating hybrid, green cars.

There is no excuse why we don't have electric cars, hydrogen fuel cell cars, water-based "HRO" autos that don't pollute the air and can actually create more oxygen as an emission from the cars exhaust. These technologies are already available and could have been massed produced in the past 20 years.

As the movie-documentary "Who Killed the Electric Car" points out, there was a concerted and powerful effort make by some super-influential corporations to make the US and he West dependent on fossil fuels for a long, long time.

I wonder if Exxon Mobil (NYSE:XOM), ConoccoPhillips (NYSE:COP) and BP (NYSE:BP) might know who those super-influential corporations are? Whose elected politician and representatives conspired to make us all addicted to foreign and domestic oil at any price?

So the time to tell the politicians that we are "..mad as hell and we won't take this anymore"is now, right now! We want solar energy, we want sustainable sources of fuel that won't cause greenhouse gas pollution or poison the oceans and our drinking water. Not tomorrow, not next week, but right here and right now!

The only reason we should learn to love 3-Digit oil ($100-a-barrel up to $999) is because that is what it takes to get us fired up enough to break our addiction to toxic, environmentally hazardous forms of fuel like oil and for that matter coal.

Outrageous energy prices will make us seek "green solutions" and help motivate us to be better stewards of the most beautiful planet in our solar system. It might also embolden us to force our elected officials to stop squabbling and start funding alternative sources of clean energy.

Disclosure: Author holds long positions in some of the above-mentioned securities

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This article has 26 comments:

  •  
    Jun 18 08:31 AM
    interesting article,......possibly the most important point is the need to agressively make our dissatisfaction known to the elected representatives who have behaved more like prostitutes regarding energy than responsible leaders.
    Reply
  •  
    Jun 18 08:54 AM
    Why do so many people think that the government is the answer to our prayers? I guess the Germans in the 1930s thought the same thing.

    The only way the gov. can help is by getting out of the way--stopping all subsidies and letting the oil companys drill and not standing in the way of nuclear plant construction. ALL my anger is directed at congress.
    Reply
  •  
    Jun 18 08:57 AM
    Another positive outcome of high oil prices is that local labor becomes competitive once agian.

    An example of this is Chinese steel. It was dominating the global market under conditions of sub-$100 dollar oil and a high valued US dollar.

    For the first time in recent memory, the combination of a weak US dollar and the cost of transporting Chinese made steel has made it highly uncompetitive. US steel manufacturing is reversing the trend of imploding output and is increasing its output of locally made steel.

    Jeff Rubin (CIBC) has an interesting article on this

    Reply
  •  
    Jun 18 08:57 AM
    Trying to make XOM, COP, CVX, etc responsible for developing alternatve energy sources is crazy. They are in the oil and natural gas business and no corporation should be forced to use it's profits to develop a technology that will put itself out of business. Of all the hot air coming from the morons in Congress could be harnessed, the energy problem would be solved. All this talk about alternative energy isn't going to solve the problem of the 200 million conventional gasoline fueled cars on the road. The Politicians seem to believe that the average American should simply trash his car and spend $45,000 on a new electric or some other "alt. energy" vehicle. As the elitists that they are, they can't pit themselves in the place of the average American. If Obama gets elected, with his friends running Congress, we better get used to $5.00 or $6.00 gas. For the U.S. to blame OPEC for not producing enough oil, when we ourselves refuse to do so is idiotic.
    Reply
  •  
    Jun 18 08:59 AM
    Good point. Maybe those freeways will become parking lots. Could be that short term greed will trump all and send us back to the horse and buggy. Horses pass gas stations. Responsible leaders have been bought by the super influential.
    Reply
  •  
    Jun 18 09:43 AM
    "Horses pass gas stations." Actually, horses pass gas. full stop. So do cows. Wonder what their impact is on Greenhouse Gases?

    Sharksm, love your attitude! All the clamoring about why doesn't "Big Oil" invest in alternative energy...yada yada yada. They are "Big Oil", not "Big Batteries" or "Big teensie little cars" etc. Other companies should do this. And investors can decide to rotate out of Big Oil and into Big Greenies.
    Reply
  •  
    Jun 18 09:45 AM
    I agree with you sharksm,

    These politicians (with their ivy league degrees) have no concept of basic economics.

    Energy companies make modest profits (I am not in the oil industry, by the way.) The 2007 profit margin of Exxommobil was only 10%, not too different than the S&P 500 average of 8%. Investing in alternative energy sources will drive this margin down to 4 or 5%. They make as well invest in long term bonds to get the same return, instead investing in risky alterantive energy projects. If government wants to encourage alternative energy investment they will need to offer tax incentives, which are not too popular with voters who think oil companies are the biggest beneficiaries of high oil prices (when in fact it is government via fuel taxes).

    OPEC "unofficially&quo... actually wants relatively low oil prices as the Saudis and Kuwaitis have hinted many times. If oil goes to $300 or $400, the development of alternative energy technologies makes a lot of sense and OPEC will be out of business.
    Reply
  •  
    Jun 18 10:06 AM
    "There is no excuse why we don't have electric cars, hydrogen fuel cell cars..." Who's at fault? Look around. Don't blame the auto companies. They produce what people want to buy. Look back into history and you will see many small fuel efficient vehicles sitting on the lot, discounted and not selling. Hybrid cars are good but people had figured out the higher cost outweighed the fuel savings. Ford has a very good Escape Hybrid that has been out for several years, but is only now selling and not all hybrids are the answer. The GM Yukon hybrid gets worse fuel economy than the Ford Flex with new 6 speed trans. BTW, compare vehicles on a class or weight basis and most American products get better fuel economy than the Japanese. Imagine that?
    Reply
  •  
    Jun 18 10:38 AM
    You CA Greens are all pretty much alike. The problem is that like your presidential candidate, you all haven't even a CLUE when it comes to basic economics.

    So, if $100+ oil is good for our economy, why is $200 too high? That ranks right up there with, "It will take 5 years to develop our domestic oil and gas reserves," so don't do it, and, "A million barrels of oil per day from ANWR would only satisfy our energy demands for a year."

    I used to think the reason for this type of sophistry was your so-called "world class" universities stopped teaching Economics 101. But now I've revised this notion... your elementary schools must have quit teaching basic math, as well.
    Reply
  •  
    Jun 18 10:44 AM
    Where do you think the electricity for electric cars comes from? How about the hydrogen? The answer is from fossil fuels. Hydrogen and electricity are energy FORMS, not energy SOURCES. We get electric from coal and hydrogen from natural gas. These cars don't solve the big issue. In fact, if everyone "plugged in" today, we generate more CO2, not less.

    I wish people would look at the big picture when they talk about environmental solutions. You have to look at the end-to-end picture when you talk fuel cell or electrics. They are not polution-free by any means. Now, if you said we should build more nukes to power electrics, I'd be ok with that.
    Reply
  •  
    Jun 18 10:57 AM
    The energy and global warming conundrum is not going to be resolved by just inventing or resorting to hybrid, electric and smaller automobile vehicles. It really needs "change" and real drastic and fundamental change change in our life-styles in many ways. Smaller and more energy efficient houses, the end of suburbia and distant commuting lifestyles, much more public transit which is affordable, the end of intercity commuting for going to work in an office and related, perhaps mega- and livable towns/cities coming into fashion again, etc and etc. What the American car driver will save by using hybrids, electric, hydrogen and etc and etc would be more than offset by several times by newly affluent Asians and Latin Americans. The American model of lifestyles have to undergo rapid change to save this planet, because that is the basis or ideal which the world at large tends to copy. And, that copying on a mass-scale is marching us all on toward bigger and bigger disasters in all kinds of ways!
    Reply
  •  
    Jun 18 11:21 AM
    A little comment about hybrid cars: they don't work. Well, at least not when you drive over 30 mph when the "fossil" engine kicks in.

    I don't know about you, but if I drive 30 mph or less where I live, I'll cause an accident. Hybrid cars (electric) are definitely a step towards the right direction but right now they do little or nothing to solve our transportation problems.

    Reply
  •  
    Jun 18 11:32 AM
    Stockpikr,

    I very much enjoy your very incisive and well informed posts on energy issues. Thank you!

    That said, it's surprising to me you're not more open to Parsley's notion of inorganic oil. Reading Thomas Gold, et al, the science behind this idea appears very sound to me.

    Although this notion would have little impact on the price of oil in the near term one way or the other, if true, it would be useful in challenging the belief that we're running out.

    What do you think...?
    Reply
  •  
    Jun 18 11:48 AM
    Re. Hybrids,

    Yes, they're in their infancy right now. Recently, a privately held Washington based start up drove an SUV hybrid across country claiming an astounding 150 mpg! Like every other new technology, it will take awhile for it to mature. (...Indeed, it was only a few years ago we were working with Kaypros... ha, ha!)
    Reply
  •  
    Jun 18 12:31 PM
    Stockpikr, you're quite right. In fact if every car was plugged in we would save maybe 20% of our oil consumption. Assuming that is the only solution is like believing ethanol would save the world! Who eats corn anyways...
    Reply
  •  
    Jun 18 12:41 PM
    Sharksm, the energy companies (XOM, CVN, etc) are in the energy business. Their oil supplies are drying up or being taken over by nationalized corporations. They need to come up with new energy sources to stay in business, BP is not promoting itself as 'Beyond Petroleum' for nothing. Get informed.
    Electric cars do not need to cost $45K, with mass production they will be equivalent to cars on the market, with a lot less maintenance and repair needed. They can be powered by unused electric capacity at night, with a very minimal increase in CO2 - saving CO2 by reducing (by attrition) the number of inefficient gas guzzlers on the road. An existing ICE vehicle is <30% efficient (converting fuel to motion), electric vehicles are about 90% efficient.
    Last point - our own oil supplies will be fully tapped, I'm sure, but why not wait until we need the oil to keep our farms running, no reason to use our own oil now just to keep John Doe driving to the grocery store in his Chevy Tahoe. We don't have enough to keep ourselves powered for long at all, or we would already have done this in the oil embargo of '79.
    Reply
  •  
    Jun 18 12:48 PM
    Stockpikr has a point. Fuel cells in particular are not a magic bullet. But electric cars are more efficient than ICE, they haven't been used because of entrenched beliefs and perception about battery needs. We need to make rational changes when faced with a coming crisis (it isn't here yet, folks!). Electric cars are part of the solution, but not the only part. Unfortunately, Brahm might be more correct than we want to think.
    PaulK, even if abiotic oil is true (definitely not a mainstream idea), it would be so hard to find and so far to drill to these ultra-deep sources that oil prices wouldn't be any lower than they are today. Read the above story about Brazil's ultra-deep wells.
    Reply
  •  
    Jun 18 01:31 PM
    Nerf,

    I agree. I also believe, as you do, that the real energy crisis isn't here yet... but it's coming! The continued intransigence of our Congress as regards any sort of comprehensive national energy policy will see to that. As for the Brazilians, let's see how they do compared to us. So far, they're ahead by miles!
    Reply
  •  
    Jun 18 02:07 PM
    It's interesting to note that Hillary had the right idea about ethanol, at least in part. She wanted to copy Brazil's mandate requiring all gas stations to have ethanol pumps. The problem is that she was planning to use corn as the ethanol feedstock, in lieu of sugar.

    But it's not too late. Sugar contains 6X the energy of corn, so making ethanol out of it isn't a negative sum game. And sugar is cheap. We already grow it here, and we can plant alot more. We can also take the tariffs of it and import the rest.

    Sugar based ethanol start-ups are already occurring in Louisiana. The only problem is there are very few ways to invest in the stuff (...no ETF's yet), and it would require the Congressional actions described above.

    Besides their recently discovered giant offshore oil reserves, Brazil runs ALL their vehicles on sugar-based ethanol already. And at a deep discount to the price of imported oil. Unfortunately, it's doubtful our Congress would ever do something smart like that here.
    Reply
  •  
    Jun 18 03:51 PM
    You can sell leases to drill in the environment. You can produce more oil but it will not lower prices?
    Why?? OPEC is a monopoly that controls production of oil. If we produces 500,000 of barrels of oil extra a day, OPEC lowers their production by the same amount. results=same price. Duhh.
    If oil drilling leases are sold we need a cost plus factor to return say 20% of the monies to the states to lower the gas prices. This one time sale to oil companies is bad.
    That said let's destroy the caribou, polar bear & seals habitat once and for all! Just like we killed the buffalo, Indians and bald eagles. Let's get those oil spills going people. Just last week we had another oil spill in the ocean off the coast of South America. Bet very few people knew about that!!
    Reply
  •  
    Jun 18 03:59 PM
    Do you think electricity prices would go up significantly if we had a lot of hybrid/electric cars on the road? Would your $50.00 a month electric bill go to $300.00 per month? Can the electrical grid handle the added stress?
    Reply
  •  
    Jun 18 05:16 PM
    Nerf: What's your point? I'm not arguing against more fuel efficient cars , hydrogen cars, etc., etc. I'm merely stating that COP, XOM, CVX, etc are oil and natural gas companies. It's not their responsibility to develop anything other than more oil and natural gas. I suggest all the gasbags in Congress who are asking for alternative energy, raise a few billion dollars and form their own company. I have been invested in energy since it was $12 bbl and nat. gas $1.75 mcf. It's not my responsibility to help out the morons in congress who want more oil at cheaper prices and refuse to allow drilling.
    Reply
  •  
    Jun 18 09:59 PM
    My dentist's father, a civil engineer, helped build nuclear power plants in Taiwan. Where it took the Taiwanese 2 years to built, Americans take about 10 years due to bureaucratic red tape. Recently, the Democrats shot down Bush & the GOP's call for offshore drilling, mot likely a response to the failure of a solar initiative to pass. When will all this political bickering stop, I'm hoping bipartisan tensions will be more lax by the time we have a new president.
    Reply
  •  
    Jun 18 11:19 PM
    Hello??? If oil hits $240.00 per barrel, who besides Bill Gates, Warren Buffet, and the Bush family will be able to put more than 1/2 a gallon per week in their car? If oil even remotely comes close to $240.00 per barrel, the games over. Oil must drop well bellow $100.00 per barrel to at least $50.00-$60.00 per barrel and stay that way for more than just a few months if our economy is ever going to realize any stability and healthy growth. Whoever lives in the White House for the next 4-8 years must do whatever is necessary to keep oil prices stable at a reasonable price. Very high gas prices will hurt our economy way beyond our worst fears.
    Reply
  •  
    Jun 19 11:22 AM
    sharksm, I agree with your basic points (We shouldn't mandate XOM, BP, etc. to do or not do certain things, though they may do it on their own, and we should invest in alt. energy R&D and production).
    But we can't drill our way out of this problem. We simply don't have enough oil in our control (ANWR, off-shore, etc) to raise production enough to lower prices. I'm sure eventually we'll drill there anyway., but let's save it for the real crisis yet to come.
    And your original post suggested electric cars are expensive & unrealistic, which I disagree with. We are going to see an explosion of new cars (finally!) in the next 4 years - hybrids, PHEVs, BEVs, due to market forces. CARB, PNGV and other government mandates tried to lead companies here proactively, but it took market reaction to get real movement. Unfortunately American companies were slower to react than others.
    Reply
  •  
    Jun 19 02:37 PM
    Interesting mention of Petrobras. Today is the day to buy PBR, as $66 is the day we have been waiting for... we PBR longs have see again and again, we now need to get ready again for a big one... we have april, may and june record prices for all PBR products, yet PBR always outprices the competition, and oil companies turn to PBR for everything they need... PBR now preparing to go into its usual amazing earnings season/report, like everytime it has its regular quarterly stock price rally higher... only positive news, no negative news all quarter for PBR...oil and thus ethanol prices are much higher for all of the quarter, demand greater than last quarter. PBR creates its energy/fuel/oil and its refined products cheaper, better, and all customers and investors in South America, asia, europe and the US are aware of its inexpensive and essential production... it is a household name in Brazil, and all over the world now, still growing profit exponentially, hence why IBD rates it one of the top 20 companies in the world to invest in. See its latest rank in investor's business daily, I believe it is still so ranked or near... there is no bad news. PBR has its own railroads, ships, proven methods, well trained employees, low wages, big demand from asia... my favorate strong buy/long term own, great for your future type companies... it stock price should be 45% higher by year end, easily... inflation new cost of oil all quarter, and strong ethanol and refined oil product demand should make sure of that... hence why Cramer also loves PBR... have patience... It will soon be at the analyst predicted $90 soon, perhaps by late July...

    Yours Truly, your friend, the Stockaccumulator...
    Reply
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