Oil Will Only Fall So Far

by: Michael Fitzsimmons August 13, 2008 | about stocks: COP / CVX / GLD / IAU / PBR / SLB / STO / XOM    

Michael Fitzsimmons

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While the peoples of the world settled into their easy chairs to watch the much anticipated opening ceremonies of the Olympic games in Beijing, Vladimir Putin had athletics of a very different sort on his mind. Putin's timing was as perfect as a military invasion of another country can be. I just wish I could have heard the conversation he and Bush had in the bird's nest.

Now, I'm not going to pretend I know the history of the Georgian/Russian relationship, but I do know this much: the invasion had little to do with democracy or separatists and everything to do with the so-called "BTC" pipeline (Baku-Tbilisi-Ceyhan) that carries oil from Azerbaijan and Caspian Sea area to the Turkish port of Ceyhan on the Mediterranean Sea. The BTC is a strategic energy conduit for Europe. I believe there is also a natural gas pipeline along this route, but don't quote me on that.

Faithful SA readers will note during the "Iran debate" I wondered out loud how long Russia and China will look the other way while the US plants troops on top of the largest oil reserves in the world. Think about it: invading Iran would have brought three of the world's largest oil producing nations under the US umbrella (for lack of a better term): Saudi Arabia, Iraq, and Iran. At the same time, the US was backing Georgia's wish to join NATO and planning to install a "missile defense shield" directly on the Russian border in Poland. How could Russia stand by and do nothing, especially when most of this action was much nearer to its own backyard? The answer came on the opening night of the Olympics: no longer will they be passive.

Faithful SA readers will also note my May 18th, 2008 article, "Russian Energy and US Implications", was quite clear in pointing out what is at stake and how US policy was playing right into Russia's hands. Now, all the US can do is watch and talk (similar to Bernanke and Paulson with regard to US monetary policy) while Russia strengthens its stranglehold on European energy supplies. Meanwhile, the US's own soft under-belly is increasingly more exposed because there have been no significant changes in the non-existent US energy policy.

Here again is my own comprehensive long-term energy policy, updated and perfected. I have submitted this twice to the Wall Street Journal. Once, after they printed several of my letters to the editor with respect to energy, and again after Jenkins' pathetic article on the WSJ's "Opinion" page criticizing Boone Pickens' plan while offering no plan of his own. I sent the article in to the "Opinions" editor as requested, but alas, no ink could be spared for the one thing that can save this country going forward: a strategic, comprehensive, long-term energy policy. I say that so much I'm sure I just bore the hell out of all of you. That said, I believe it is the single most important issue facing the United States of America. I mean, don't those idiots in Congress have children or do they only care about under-the-table money?

Meanwhile, the markets continue to act completely insane. The Russian attack on Georgia should have lifted oil, but it didn't. StatOil (STO), a critical supplier of European energy should have popped big-time, it didn't. ConocoPhillips (COP), Chevron (CVX), Exxon (XOM) and Petrobras (PBR) all recently reported outstanding earnings - and all of them traded down. Even Barron's had to take note and devote some space pointing out that these stocks are trading at 6 and 7 times forward earnings, pay a dividend, and supply the energy with which the world is addicted (note: Barron's came a week after this piece).

Yet, the stocks continued to trade down this week as though no one is reading Barron's any longer. I continue to get emails from around the world questioning my investing intelligence (some just call me an idiot - or worse). Well, sorry folks, I just don't believe oil will get back to $35 or $40/barrel, which is damn near where it would have to go in order to value the energy stocks as they are. Nor is the geopolitical scene calming down - the exact opposite is true. I believe I'll wake up one morning and see oil spike $20 or $30/barrel based on some geopolitical event. I believe on that day the entire energy complex will rise so fast it will be shock and awe of a different kind.

So, why are these energy stocks trading at such bargains today? The dollar strengthening? I don't buy it - the US dollar is the biggest fiat currency in the world today. With no energy policy, huge debt levels, and no energy policy,the long-term case for a strong US dollar is non-existent. Perhaps investors believe financials, retail, automotive, and consumer stocks are the place to be these days. Give me a break, but good luck with that.

One real possibility, in light of recent Bush administration support for nationalizing the mortgage, banking, and financial sectors would be for the US government to take over the US oil majors. That would complete the fascist overthrow of what used to be the wonderful experiment of an American constitutional democracy. If the US people fail to demand its leaders deliver an energy policy, take-over of the energy companies by the military could indeed be a possible endgame in a world in which oil supply will very soon fail to keep up with demand. In that situation, the only card we have to play against Russia (which has the energy we will need), is a superior military. The bad news there is that Russia, of course, has nukes too.

Meanwhile, gold continues to melt down along with oil. I'm buying a lil bit here and there and making the investor's big mistake of averaging down. I like to swim against the tide I suppose (even though I know to swim parallel to shore during rips). Gold going down in this environment makes as much sense as oil going down. So, this way I get to be wrong twice in the same article.

Bottom line for investors: buy COP, XOM, CVX, STO, SLB and PBR. Buy gold coins along with your favorite energy service firms or the ETF. I still believe energy service firms will be the single best long-term investments in the years to come. Good luck!

Disclosure: The author owns every investment recommended in this article.

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This article has 66 comments:

  •  
    Aug 13 07:22 AM
    I don't think the author is crazy,all you write about can happen of course but you and me will be much older by then.
    I am Russian,only living in Frankfurt far away from the waste and industry in FSU.
    Mr.Medvedev (or Mr.Putin as you quote) really catched all the Western European and American politicos on the balls and Russian bear will not losen his grip.The power have already shifted to the East,THAT'S IT.
    The best thing would be for Americans to learn from Europeans,which is to shut up,sit put and buy Oil/Gas from Russia while it is still available at acceptable prices.And soon to learn to pay more and more but still sit put as nothing can be done about it,the Oil/Gas belongs to Russian federation and there is no legal framework o take it away,Russia is not stupid Iraq,it will never let it happen,never.
    The author is right to point out that one day probably very soon Oil/Gas will continue to go back up and it have sense to hold Oil/Gas other resources stocks,but I would advise to buy this stocks directly from the company not through the bank or broker,as FDIC guarantees each American's deposit up to 100,000USD is insured and only if it is CD's,cash or Treasury Bonds.
    All else is not guaranteed,even if investor have 50,000USD in Exxon or in Newmont Mining that he bought through his/her bank or broker,in the event broker goes bankrupt or bank,this investors will be left with nothing.As stocks they helded with their bank/broker is on the books of that institution and be written down with everything else if bank's debts exceed it's equity,capital base.
    So if one prepares for Dow Jones at 5000 points (it will not take too long,already by December we will see the animal at 9000 at best) or lower,please inquire how to buy your big cap Oil/Gas/Mining stocks directly fro the company as only then you will have the prove that you are direct shareholder,not a holder of shares that are sitting on bank's balance sheet together with CDO's and other atomic junk.
    Great article,you must write for the WSJ,FT and Barron's.
    Reply | Link to Comment
  •  
    Aug 13 07:47 AM
    you sound like a cold war brainwashed knucklehead. read some british papers to get a less biased view on the chronology of the conflict.
    Reply | Link to Comment
  •  
    Aug 13 07:58 AM
    'the invasion had little to do with democracy or separatists and everything to do with the so-called "BTC" pipeline (Baku-Tbilisi-Ceyhan) that carries oil from Azerbaijan and Caspian Sea area to the Turkish port of Ceyhan on the Mediterranean Sea.
    ...
    Meanwhile, the markets continue to act completely insane. The Russian attack on Georgia should have lifted oil, but it didn't.'

    kommersant.com/p-13078.../

    Fitzy,
    Don't ASSume, BRAINsume! The same headline was aired by Reuters as well. The next time you make statements of fact, bother at least to verify them, don't just ASSume that you can join the political propaganda bandwagon and manipulate the sheeple. You could have called British Petrol and verified the same information independently.
    Reply | Link to Comment
  •  
    Aug 13 08:07 AM
    And in case you are still long oil expecting the 'war' to prop it up, the BTC (1.1% global supply) has been shut down for more than a week due to a fire in Turkey. Go and blame it on the Russians, heck blame the margin calls you are getting now on the Russians as well!
    Reply | Link to Comment
  •  
    Aug 13 08:21 AM
    bbzz24: if i agreed with washington's viewpoint as you accuse, then why doesn't washington adopt a real long-term strategic energy policy? if i agreed with washington, then why would i have pointed out that the "star wars" strategy wrt russia was stupid? i'd rather know and use one language correctly then know 3 and not understand any of them.

    bbzzz24: wrt the article you reference, do you really believe russia could not have taken out the pipeline if they wanted to? jeez man, THINK. they are sending a message. they are saying that they COULD take out the pipeline any time they wanted to.

    bbzz24: i never blamed the pipeline outage on russia, that was your interpretation. what i AM saying is that russian troops are on the ground in georgia and have the POTENTIAL to control the pipeline any time they want. there is a difference, but apparently geopolitical nuances are not your specialty.
    Reply | Link to Comment
  •  
    Aug 13 08:25 AM
    "the invasion had little to do with democracy or separatists and everything to do with [oil]." Good interpretation of the real reason for the Russian actions, which parallels the seldom-stated but real reason for the US planting feet in Iraq.

    The larger problem is that since at least 1973 we have failed to take steps required to defend ourselves against dependency on unfriendly foreign governments for energy. We Americans have become too fat, dumb, and happy to do the hard work required to free ourselves of dependency.
    Reply | Link to Comment
  •  
    Aug 13 09:05 AM
    If the Chinesse are driving every other day and most of the factories are shut down, all this because of the Olympians need clean air while they breath, what do you think this is doing to the price of oil? Can a communist country affect the world supply of oil by controling it's people's ability to consume it? On top of that, China and India along with many other countries reduced their subsidies on oil to their people. I'm sure that also had an affect on the consumption of these underdeveloped countries use of oil. Now the $54 question is, how will the price of oil react when china resumes it's normal usage of fuel?
    Reply | Link to Comment
  •  
    Aug 13 09:13 AM
    'You're either with us, or against us'
    This principle coined by Mussolini seems to be deeply engraved into U.S. geopolitics.
    Russia went there to prevent genocide against Russian citizens. Matters of fact are:
    1. Saakashvili is a CIA puppet (studied common law on State Department stipend, and common law is practiced ONLY in British colonies, present and past);
    2. His 'revolution' was funded from outside (you guess by whom);
    3. His country has waged war on 4 distinct ethnic groups within it's borders;
    4. Russia is pissed off with gun touting in it's face by U.S. 'ally' who was propped to behave like this.
    5. Russia has secured long term deals with Azerbaijan and Kazahstan to make sure there is very little gas left (at present none) for the Nabucco pipeline;
    I can go on and on. Just check to see if you can find in any U.S. newspaper coverage on the latest story from the region: 2 U.S. diplomats caught in Kyrgizstan with 53 guns and 15,000 cartrages of ammonition. Maybe you only are seeded classified information.

    With respect to energy policy: it seems the whole U.S. economy (and foreign policy) is planned around abundant and cheap oil: huge urban sprawls, huge SUVs, invasion of sovereign countries rich on oil, support of non-democratic governments (Saudi Arabia, Georgia). There is no easy fix to this, not smaller cars, not alternative fuels, not public transportation. What was easy though was to invade a country and further constrain oil supplies at time when everyone was pushed into SUVs and further driven into the periphery of urban areas. Your grandparents really thought they escaped feudalism from Ireland. Ask them again what they think.

    'i'd rather know and use one language correctly then know 3 and not understand any of them. '
    - learn the difference between than and then.
    Reply | Link to Comment
  •  
    Aug 13 09:42 AM
    bzz24: if you think Putin cares about the 70,000 ethnic russians more than he does the oil pipeline, you are naive.
    1. agreed
    2. agreed
    3. i don't know about this
    4. agreed
    5. not sure
    all that said, what does this have to do with my article except to support my point of view?
    wrt energy policy, perhaps you did not read mine as that is exactly what i am saying!
    please leave my grandparents out of this discussion as you don't have a friggin clue, ok? and i would love to ask them what they think, but they are no longer around to ask, so, bug off on this will ya?
    your debating skills are lacking though, because you simply gave up on your original points once i pointed out how incorrect they were. so, giving up on the original argument is basically conceeding that you were wrong to begin with.
    Reply | Link to Comment
  •  
    Aug 13 09:44 AM
    russian invasion of georgia was timed to occur while world attention is diverted to china olympics.
    > jack
    Reply | Link to Comment
  •  
    Aug 13 09:48 AM
    It is no coincidence that Russian military fortunes have been directly related to oil prices for the last 30 years.

    In 1979 when oil prices were at record levels, they invaded Afghanistan to expand their empire and setup a stepping stone into Iran . No doubt, Iran was probably the next target after the dust would settle from the Islam revolution and the Iran-Iraq war.

    Interesting enough, when Canterall, Prudhoe Bay and the North Sea came on line in full force in 1985, the global market was glutted with 20% spare capacity. Since the USSR's major export is oil and gas, they immediately saw 75% drop in revenues as oil prices plumetted from $40 to $10 a barrel in 1985. This combined with their costly campaign in Afghanistan and trying to keep up with Reagan's SDI program eventually bankrupted the USSR and forced their breakup in 1991. They would be in an economic mailaise for next 10 years.

    As prices started rising in 2001-2002, they paid off all their debt and Putin starting consolidating his power base. He orchestrated the phony tax evasion charges against Lukoil and promptly put its CEO Mikhail Khodorkovsky in jail, thus neutralizing his primary political rival. Then the company was liquidated at bargain basement prices to Putin's friends at the remaining oil companies.

    Putin and Medvedev are obviously rebuilding the "evil empire" starting with the strategic areas (with pipelines) first. They know Europe will keep its complaining to a minmium since GAZPROM is the primary supplier of natural gas into Europe.

    I would be very worried, if I lived in Estonia, Lithaunia or Latvia right now. When Russia expands, the Baltics are usually swallowed early on in the campaign.
    Reply | Link to Comment
  •  
    Aug 13 09:52 AM
    <<russian invasion of georgia was timed to occur while world attention is diverted to china olympics.>>

    I like how Bush refused to cut short his little China vacation and let the real President, Cheney, do the saber-rattling back home--if that's what you call the pathetic mews out of Washington. Disengaged moron.
    Reply | Link to Comment
  •  
    Aug 13 09:54 AM
    Details aside, viewed from Russia's point-of-view the author is correct about Russian concerns about American policy. If you were Putin or Medvedev and you believed that control of energy will be the source of power for the next 20 years, you would not be happy with the U.S. in Iraq, the U.S.'s relationship with Saudi Arabia, and the fact that a large fleet of naval ships sits off the coast of Iran. Those facts combined would provide even a reasonable person with a concern that America is trying to control oil--and Putin isn't reasonable.
    Reply | Link to Comment
  •  
    Aug 13 10:56 AM
    Yes, there is a gas pipeline parallel to BTC from the Caspian Sea through Georgia to the Turkish border where Botas, the Turkish pipeline handles to gas through Turkey to Europe.

    All three pipelines operated by BP are shut down: BTC due to a fire in Turkey plus the gas line and Baku-Supsa to the Black Sea due to force majeure because of the Russian miltary action in Georgia.

    I agree that oil and gas producers are valued too low by the current market.
    Reply | Link to Comment
  •  
    Aug 13 12:18 PM
    It would be interesting to know what naked shorts there have been placed on oil during this crisis. It seems to be somewhat well understood that that the Bush government is countering any rise in gold with naked shorts placed by its surrogates. This is surely to camouflage the real rate of inflation. Isn't it possible that the Bush administration, through surrogates, is doing the same with oil? Is there any better theory as to why oil (and gold) is behaving so contrary to basic economics?
    Reply | Link to Comment
  •  
    Aug 13 12:38 PM
    It's the speculators, stupid. And the high prices for gasoline, diesel and heating oil. And lower demand.

    Any action by Congress on the Oil Speculation Bill in September or October will drive more speculators out of the futures market.

    A few weeks ago, you didn't listen to me. Oil prices are going lower....below $100.00
    Reply | Link to Comment
  •  
    Aug 13 12:56 PM
    Fitz, super article. Could not agree more.
    Reply | Link to Comment
  •  
    Aug 13 01:20 PM
    gO RESPIRATE!! You are so right - WE are the problem; since 1973!!!!

    Starting in DC - Detroit to Houston - and then the people.

    We have to point nowhere outside the US to examine the causes of our own energy problems - we've stared it in the face for 40 years and thumbed our noses at it (oh yes, we reduced our own production, BUT WE DIDN'T REDUCE OUR CONSUMPTION - SHAME ON US!!!).

    Those outside the US have the opportunithy AND THE RIGHT to bring that to our attention - we, inside the US, appear to be unable (inable) to do it.
    Reply | Link to Comment
  •  
    Aug 13 01:24 PM
    And, lest I forget my mantra {like kudlow's DRILL, DRILLL, DRILL,},
    NOT ONLY DID WE NOT REDUCUE OUR CONSUMPTION OF CRUDE,

    WE DID NOT DEVELOP AND IMPLEMENT OUR ALTERNATIVES!!!!

    SO, go Boone, Warren and Bill!
    Reply | Link to Comment
  •  
    Aug 13 01:42 PM
    Fitz - I looked at your website Opinion article/energy plan (again, and stopped short of finishing it, again) and suggest that you differentiate Problems (measurable dependent variables) from Causes (independent CAUSES OF THE PROBLEMS - Causes are what gets changed to fix the Problems (which you measure); CAUSES GET TESTED FOR VALIDITY.

    And there are CONSEQUENSES TO CHANGES IN CAUSES OF PROBLEMS: INTENDED (of course) and UNINTENDED.

    CAUSES SHOULD BE PRIOITIZED FOR A VARIETY OF REASONS: ease of implementation, feasibility [technical and economical], etc.,

    I suggest you (being an engineer, etc) find, read, and apply an old but helpful book "The Rational Manager" to you plan; it may strengthen it mightily, and simplify it. Then, maybe, those it's intended for would be able to understand and use it.
    Reply | Link to Comment
  •  
    Aug 13 02:44 PM
    The bottom line, to me, really is that we had a correction in oil and might have another one, but, long-term, prices will go considerably higher. We're past peak.
    Reply | Link to Comment
  •  
    Aug 13 03:05 PM
    Here's a new thought - consider it a future Media Headline:

    "US Crude Reduction Exceeds Increasing World Demand!! Gasoline Prices Drop!!!!!!"

    byline: "15% cut in US daily diet of 20,000,000 barrels of crude floods India and China in Oil."
    Reply | Link to Comment
  •  
    Aug 13 03:57 PM
    CORRECTION TO YESTERDAY'S HEADLINE WHICH WAS PRINTED IN ANTICIPATION OF THE OUTCOME (reimind you of an earlier Presidential election newspaper?).
    Aug 13 03:05 PMHere's a new thought - consider it a future Media Headline:

    "US Crude Reduction Exceeds Increasing World Demand!! Gasoline Prices INCREASE!!!!!!"

    byline: "15% cut in US daily diet of 20,000,000 barrels of crude floods India and China in Oil AND GASOLINE PRICES STILL INCREASE."
    Reply | Link to Comment
  •  
    Aug 13 04:14 PM
    Hi Micheal,
    Enjoyed your blog immensely, and will be looking for you in the future.
    Perhaps, you could add me to your mailing list?
    Thanks, Jeff Knorr
    jaksons4@yahoo.com
    P.S. Nice trout!
    Reply | Link to Comment
  •  
    Aug 13 06:13 PM
    I think, Michael, that the failure of our elected officials to generate and implement a comprehensive energy policy borders on treason at its worst and a blatant lack of knowledge of strategic and economic imperatives at its best. The stubborn adherence to an either drill or foster alternate energy sources makes no common sense. Those of you who believe alternatives can solve our dependence on foreign oil in less than 10 years even if we make a commitment of well over 2 trillion dollars to do so and commit ourselves as a nation to create the required infra-structure, please sound-off. Those of you who believe that we can't drill for our own oil in less than 6 years should tell me what the Chinese timetable for getting oil 70 miles off our coast is. Now that said, whatever the vagaries of the oil commodity price is short term, it is an imperative that we make getting off mid-east, Venezuelan and Russian oil as quickly as possible and our elected officials create the comprehensive plan,now. I put forth one in 1991 and it got incorporated in the Congressional record that has a lot of similarities to yours Fitz. You know what effect it had. As for the Russian propogandists who responded to your article, Putin is acting just the way the Russian post-cold war spy who defected, predicted in the current book, Comarade J.. I just want those Russian apologists to know that this is my country and I just visited Russia. Give me the USA any day and with all our faults , Russia is neither the moral equivalent of the USA, nor does its gov.respond to the basic needs of its citizens in a way that reflects its new found wealth. All I can say is that these folks' rhetoric is the equivalent of Kruschev's banging of his shoe while saying he will bury us. I heard that sound as a young person then, and it has a familiar ring to the words of the russians' comments above and of Putin's behavior, now. We'll see, but I wouldn't be so confident if I were them.
    Reply | Link to Comment
  •  
    Aug 13 06:54 PM
    I'm not too suprised to see crude prices bouncing around so much- up or down. The market is huge, messy, and delayed in responding to news/ rumors/ trends. Its like having a drunk and stupid captain trying to steer a big ship through narrow channels. Hopefully the price will drop low enough for us all to get a great buying oppurtunity, and so that the economy gets a breather. I'd rate the worlds chances of properly responding to peak oil as close to zero, atleast in a 10-20 year timeframe.
    Reply | Link to Comment
  •  
    Aug 13 08:07 PM
    Fitz, fantastic post --have you read "The New Great Game: Blood and Oil in Central Asia" by Lutz Kleveman ?
    Reply | Link to Comment
  •  
    Aug 13 08:24 PM
    Conservation, which is reduced consumption, is an ALTERNATIVE with immediate effects (as are alternate energy sources, alternate conversion methods, alternate uses - and still accomplishing the required useful work).

    Conservation is good for a 10-15% immediate reduction in demand; no new technologies required. We proved it in 1973 and 1978-9. Supply WILL be made available somewhere if we stop demanding it.

    Most blogs or responses on read here and other energy related blogs talk about various ways to continue eating crude, or modified crude etc. Just like most diets talk about exchanging carbs, fat, protein, - EVERYTHING IS FOCUSED ON CHANGING THE INTAKE OF SOME SORT, BUT WHERE IS THE ELIMINATION?

    I, WE, NEVER SAW A FAT PRISIONER OF WAR............
    Reply | Link to Comment
  •  
    Aug 13 10:03 PM
    Um... not to intrude. Old Wiz raised an interesting question. There's no substitute for hydrocarbons. Alternatives are swell, that's okay, but there is never going to be an acceptable substitute for API 30-ish sweet crude (super light condensate doesn't count). So, the strategic question is how to produce more. Offshore California makes sense, but the oil play I like best is Lake Michigan and Lake Huron.

    I don't know that we'll have a chance to do much of anything before a real shooting war begins. Mistakes are the rocket fuel of history.
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  •  
    Aug 13 11:47 PM
    Great stuff, Mr. Fitzsimmons. I particularly appreciate the reminder that Russian aggression is partially a response to U.S. maneuvering around the corner, in the backyard, and at the doorstep!
    Reply | Link to Comment