Forget $100 a Barrel - Oil Will Plummet to $30

by: Jason Schwarz August 15, 2008 | about stocks: DUG / GM / HMC / TM / USO    

Jason Schwarz

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UPDATE: On August 20, I was interviewed on Fox Business News regarding this article. The video appears below: 

Remember all those times OPEC tried to tell us that they didn't want high oil prices and we didn't believe them?  Well, they meant it.  They knew that technology was available to crush oil demand but they hoped that the low price of oil would keep the technology buried.  The cat's now out of the bag.  The commodity run is over.  The talking heads are trying to temper the recent selloff in oil by saying that it will settle around $100 a barrel but that is not what happens when a bubble bursts.  Oil is headed back down to historical levels between $30-$50 a barrel.  Consider the following evidence:

1. Oil consumers quickly adjust to high gasoline prices.  June data from the IEA reports a 4.7% drop in miles driven by Americans year over year.  That equals a loss of 12.2 billion road miles of oil demand in just one month.  The adjustment has come without a hitch.  Staycations have replaced vacations.  Honda (HMC) Civics have replaced Chevy (GM) Tahoes. 

Not only are we driving less, we are using less gas while we drive.   Everyone was shocked at the gigantic $6.3 billion loss reported in GM's latest earnings announcement. What has happened to automobile demand in just two months is astounding. You only have to go through that type of pain once to never let it happen again.  The gas guzzling SUV market has collapsed overnight.  Americans have proven how easy it is to adjust to high oil.  

2. New transportation technology has arrived.  GM recently announced its goal to have 1000 hydrogen fuel cell vehicles on California highways by 2014.  Honda expects to have 200 Hydrogen FCX Clarity's within three years.  California is leading the American innovative push with 26 hydrogen fuel stations already in operation, headlined by Shell's (RDS.A) recent opening of the first retail station to sell both gasoline and hydrogen.  Of course these numbers are small but they are extremely significant. 

Hybrid numbers started small too.  Toyota (TM) just announced plans to unveil a new Lexus hybrid and the next generation of its hot selling Prius next year as the company expects to hit the one million mark in hybrid sales by 2010. 

3.  The next President of the United States will implement alternative energy on a grand scale like never before.  John McCain wants to build 45 new nuclear reactors by 2030 and ultimately wants 100 new nuclear plants in the U.S.  He also proposed a $300 million prize to the auto company that develops a next-generation car battery that will help America become independent from oil. 

Barack Obama wants to create a $7000 tax credit for purchasing advanced vehicles and mandate that all new vehicles be 'flexfuel' by the end of his first term.  He also wants to require U.S. utilities to get 25% of their electricity from renewable sources like wind and solar. 

Oil tycoon T. Boone Pickens has been traveling around the country touting his wind plan.  He claims that the Great Plains states are the Saudi Arabia of wind.  North Dakota alone has the potential to provide power for a quarter of the country.  A Stanford University study found that there is enough wind power to satisfy global demand 7 times over-even if only 20% of wind power could be captured. 

We are also seeing technological breakthroughs in geothermal energy.  Raser Technologies (RZ) can now produce energy from just 180 degree heat through portable mini-power plants.  The plan to replace oil is now the top concern of U.S. citizens.  Government subsidies will keep the alternative energy trend alive even as oil prices fall.  

4.  The last piece of evidence for a decline back to historic oil price levels is actually a secret that neither the green people nor the oil people want us to know about.  The secret is that new oil is plentiful. Oil drilling rigs are booked until 2012.  Recent finds include Brazil, the Gulf of Mexico and Africa.  

To illustrate what's happening - we're invested in a small company called Freedom Oil and Gas which is preparing to drill in Southern Utah just north of the recent Wolverine discovery well which represents the largest U. S. onshore discovery in the past 30 years. Wolverine has drilled 10 out of 11 successful wells in its field, and is currently producing in excess of 6,000 barrels of high gravity, crude oil per day.  Freedom estimates that a new discovery will provide as much as 150 million barrels of oil reserves, with each well producing as much as 1,000 to 2,000 barrels per day per well. 

The conclusions are obvious.  If you are thinking that the oil drop in oil to $115 a barrel is all we're going to see than you haven't connected the dots.  This oil spike was a bubble fueled by a group of deceived investment speculators who failed to account for adaptable demand destruction from consumers. The technology to replace oil already exists and high oil prices merely provide the necessary motivation to bring these products to market. 

The United States is leading an alternative energy charge that will spread throughout the globe and cause a major shift of power away from the Middle East.  I'll save the ramifications of such a power shift for another article but simply stated, OPEC's greatest fear has been realized.   Short oil.

Disclosure: Short USO, Long DUG.

 

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This article has 174 comments:

  •  
    Aug 15 05:45 AM
    i disagree with you... maybe we will see a drop to $75 but i doubt much more than that, the US is biggest consumer of petroleum (for now) your argument irresponsibly ignores that consumption of India and China will only go up at least for another decade or so even with the pursuit of alternatives.
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  •  
    Aug 15 05:49 AM
    Can we have some consistency here? In your "new oil is plentiful" article you refer to all the new oil that is supposedly economic to extract from ocean deeps, polar wastes, etc, because of high oil prices. Now you say that the market's knowledge of the existence of that oil will help drive the price down to $30. So it won't be extracted. And presumably, the price of oil will then rise again on the resulting scarcity.



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  •  
    Aug 15 06:02 AM
    worth a comment...with Oil at $30, I am not sure that any President would push alternative energy but more importantly...oil demand slowing? wrong...again look at the numbers DOE data: Gasoline inventories are down from 2845k to -6394k since July, 18th...lowest level in a long time. Stop watching the news...Oil is now trading on momentum not fundamentals...next level 110$ on crude then $100.
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  •  
    Aug 15 06:32 AM
    Wow... that's the second REALLY atrocious article I've seen from this guy. His lack of understanding of geopolitics is astounding.
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  •  
    Aug 15 06:38 AM
    Are gasoline inventories down because demand is up? I don't believe so. You may want to check the refiners' production numbers too. Not claiming any certainty here, but my expectation is that gasoline inventories are down because refiners are producing less in response to Americans driving fewer miles.

    Nitpicking aside, your point is well taken. Some adjusted driving habits in America don't mean we've stopped driving altogether, or that India and China can be ignored. Oil won't go to $30 until there are a helluva lot of electric cars on the road. That will be awhile.

    $100 on the other hand....
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  •  
    Aug 15 06:39 AM
    What's the backup plan for wind? If the wind isn't blowing today where do we get electricity? You can't quickly fire up an idle nuke plant - why would you want a nuke plant sitting idle anyway? You need a source of juice that can come on line quickly when the wind stops. If oil goes to $75 and gas goes to $2.50 you'll see a surge in SUV sales. If all these alternative energy solutions are so great, why haven't the Europeans done them already, since they've been paying much higher prices for gasoline (due to taxes) for many, many years.
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  •  
    Aug 15 06:55 AM
    Sorry, Jason, but the dots don't connect. A total of 1200 hydrogen cars six years from now hardly translates into oil a huge drop in oil demand. Nor does an announcement by a couple of auto makers that they will chase the prestige of hybrid, which prestige actually translates into less than a 10% increase in fuel economy in the real world. And while the SUVs are finally dead, they will soon be replaced by the next version of the American gas guzzler if oil returns to even double the price that you are predicting. Think station wagon and minivan, both of which were the predecessors to the SUV with only the body shape changing. The "cross over" is the next incarnation. By the way, if this logic caused you to invest in an oil company who specializes in stripper wells in Utah, as you state, uh Jason methinks the dots are actually specs on your glasses. Clean them.
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  •  
    Aug 15 07:00 AM
    interesting point about refiners but more link to the crack spread than the driving season. So far for refiners, i have check on bloomberg, business a bit down but nothing extravagant.
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  •  
    Aug 15 07:04 AM
    AMEN Jason! Very well stated. I have been making some pretty far out statements lately and was afraid that oil would go that low would strip all credibility. We have the near future that will prove who is right. We should not have long to wait. Congrats on finding the courage to speak the truth.
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  •  
    Aug 15 07:36 AM
    Now I understand why academic articles are normally peer reviewed before an academic journal will publish them.
    Reply | Link to Comment
  •  
    Aug 15 07:43 AM
    The author short oil. End of story. Period. Adjust your blinders and move on.
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  •  
    Aug 15 08:00 AM
    Alot of "long oil" comments here. I vote short oil, (been making a ton of money since early July) support at $100, break thru that and who knows where the bottom is.....
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  •  
    Aug 15 08:02 AM
    Jason,

    Like everyone else who promotes a hydrogen economy, you have overlooked the complex storage and transport infrastructure issues. Hydrogen not only has a negative EROI but has many infrastructure and storage issues. Not only does its small atomic size cause it to leak very easily, it is very reactive with most metals. It low density makes it very uneconomical to tranport by truck. A tractor trailer that can carry 22 tons of gasoline, can only carry 1000 lbs of hydrogen in liquid state. Conventional pipelines cannot be used due to leakage and corrison by hydrogen gas.

    Both Obama and McCain have no energy policy at all and are pandering for votes. Obama is promoting corn ethanol and imposing windfall taxes and removing E&P tax credits. This will cause food prices to continue to rise as well as reduce oil production and drive oil prices even higher (remember Jimmy Carter in 1980). McCain with his ANWR and USC drilling plan will only provide 4 yrs of oil at most, certainly not a long term solution.

    The only thing I agree with you in your article is the potential of T. Boone Pickens's wind farm project.

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  •  
    Aug 15 08:03 AM
    PS inventory and supply down? Of course, who wants alot inventory when demand is shrinking with higher costs....
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  •  
    Aug 15 08:08 AM
    For all you wind doomsayers remember that it does not take much wind at all to move those turbines around. I have them in my neighborhood and believe me they are turning with hardly any wind blowing at all. P.S. I am long on PWR.
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  •  
    Aug 15 08:16 AM
    This article is nonsense. Why? The chart of the decade:

    bigpicture.typepad.com...
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  •  
    Aug 15 08:16 AM
    Author at least discloses his short USO position, more than some touts do. But here is a different take: U.S. drivers are now all smiles when gas can be bought at $3.00 - $3.50 per gallon. Who won this round of price escalation, consumers or producers?
    Reply | Link to Comment
  •  
    Aug 15 08:34 AM
    1) Get a grasp of the word Oligopoly. That is OPEC and because of that they today control the long term price of crude. Our recent drop in demand has occurred faster than the Produce/Ship process from OPEC could adjust.
    2) Go buy a futures contract. Then tell me that on settlement day that your loss was not set by supply and demand.
    3) $20 of the move from $52 to $115 since Pelosi became speaker was from change in currency valuation.
    4) Pickens isn't all wrong but NG is the current peak demand solution and wind is the least predictable at the peaks of dusk and dawn!
    5) You and the Messiah ignore the fact that gas and diesel are but two end products from crude and demand for crude will continue to increase for resin for windmill turbines, plastics for electric car batteries, asphalt for highways etc. And, refiner's ability to adjust the output mix from a barrel of crude is limited.
    6) Putin vs. Georgia was not a tennis match. Russia accounts for 9.7 of 61.5 million BBL per day world production and much is exported.

    Get a grasp on the volumes. Every drop helps including the Utah finds but they are just a drop compared to our 33 million BBL/day demand! The 499 Billion BBL Bakken field in ND/MT/SK that are being developed while Congress stonewalls and pontificates.

    $30 crude and you're smoking something. $100 crude may be a brief reality. Alternatives are necessary and will happen but you cannot legislate technology or time and I don't plan to stop driving or eating until 2030!
    Reply | Link to Comment
  •  
    Aug 15 08:38 AM
    It is apparent financial dudes don't understand science and engineering well. True, engineers dream but the technology is here and the masses are getting sick of getting shafted by unchecked speculation greed. The genie is out of the bottle folks and is already bigger than the bottle and expanding.
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  •  
    Aug 15 08:48 AM
    While I am not trying to proselytize, the author might want to read Twilight in the Desert to get a little perspective. All of his proposed fixes won't come soon enough if Matt Simmons is even half correct. Also, the idea that, somehow, after 30 years or more of inaction that Congress is going to put together a coherent energy plan (in the space of a year or two) and that a handful of fuel cells are going to save us is patently ridiculous. Further, nuclear energy doesn't power cars.
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  •  
    Aug 15 08:59 AM
    I guess when you are short oil you will say anything to get a $5-10 dip in the price. I predict if oil drops to $30, it will all be in the ground and we will be back in caves, duh.

    Actually, the article started my day with a good laugh.
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  •  
    Aug 15 09:00 AM
    Oil is not going to drop to $30 permanently, but I wouldn't be shocked if that was the bottom during the coming global deflationary recession.

    To put the idea of alternative energy in perspective, in order to replace gasoline with nuclear powered electric cars, the U.S. would need to increase its current number of reactors from just over 100 to several thousand, depending on size. To put that in perspective, imagine if every Taco Bell in America was a nuclear plant. That's roughly how many we need to get rid of oil.
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  •  
    Aug 15 09:02 AM
    I thought I was the only "bull in the china shop". Thanks for restoring my ability to read these so called Journalistic Articles. Almost all of the posts were on the mark, IMHO.

    I especially give kudos to you-can-call-me-al, inventories will continue to drop until a new equilibrium is reached which reflects the demand destruction.

    This will probably be reflected first in stability in the refining arena. Thereafter, the old supply/demand will again arise BUT any future Oil Shocks will be exacerbated by the reduced inventory levels.

    PS the populations of the world have not stopped growing and they have not stopped eating.
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  •  
    Aug 15 09:18 AM
    Oil prices will drop with lower demand,but will rise soon after.There are no alternatives to oil. Do the research.
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  •  
    Aug 15 09:25 AM
    Oil going below $100? Yes, because demand is dropping as Schwarz says, and for another reason: the world economy is going into recession.
    But this is a short-term movement (6 months to a year) down to maybe $80 or $60, and we'll never see $30/barrel oil again, for two reasons:

    1 - Demand is permanently higher than it was, because China and India are now in the picture. The USA and Europe are no longer the only big oil consumers in the world.

    2 - New-found oil is expensive to extract. Yes, there is plenty of oil, but the days when you couild just drill a hole and watch oil gush out are gone. The Utah discovery (150 million barrels) is small; we need oilfields with billions of barrels. They exist, but under deep water, or in harsh climates.

    The alternative energy sources are there but not in the next 5 years. Do you really see 45 new nuclear reactors in the USA by 2030 - which means starting to build them in the next 5 years? It might be a sensible plan, but have you heard of the environmental movement? Have you heard of the Sierra Club? Have you heard of Three Mile Island? It just isn't going to happen.

    Finally, if a lot of people get the idea that oil is going down to $30/barrel ... they'll start buying SUVs again. Thereby preventing it from going down to $30/barrel.
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  •  
    Aug 15 09:27 AM
    I disagree. By the time all this comes to pass, my grandkids and yours will all have vehicles and will not remember when gas was cheap. They will use it just like we have and even more toys will be available to them that use energy. You can't use a solar panel on a seado and my kids all have them. You need to see what the population will be in the future before you make all you assumption's based on today.
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  •  
    Aug 15 09:30 AM
    Why isn't there a "report abuse" button at the end of the main article? This is the kind of nonsense "spin" that gets tabloid news its reputation, and isn't fit for Seeking Alpha (unless you want me to quit reading it and divert my short attention span elsewhere). Does the fact that it attracted a lot of comments get the author invited back to write more rubbish? Any hack can pull a bunch of headlines into an article and string them together with incoherent analysis. I want to hear real insight into the issue, not that the sky is falling, again (or has the bubble burst and Armageddon is upon us...?)
    Reply | Link to Comment
  •  
    Aug 15 09:33 AM
    If you believe any of this... than I have a bridge for sale you might be interested in!!!
    Reply | Link to Comment
  •  
    Aug 15 09:34 AM
    Thank you for your fine analysis. Your chain of logic supports your conclusion, but unfortunately I do not believe you are correct. The value in your article is that those who believe you will temporarily help drive down the prices of oil and gas companies I want to acquire. Peak Oil is just over the horizon, and world demand remains constant and is increasing, so while the down trend in oil prices may continue for a while it is unlikely to ever reach $30. Perhaps it will if the next President just asks us to all walk or bike to work.
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  •  
    Aug 15 09:50 AM
    is it April's Fools Day already?? have you even considered China or India? do you think either are going to play nice for the environment? Basically, if oil and thus gas come down that much we'll all be in SUVs again and prices will rise. Supply and demand.
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  •  
    Aug 15 09:51 AM
    Too bad we aren't the only country that consumes oil. The world is growing at an alarming rate. China should be proof of this. You forget to realize that China has cut back on oil consumption during the olympics. Once the olympics are over, people in China will continue to purchase oil products at a realistic pace.

    And the fact that oil consumption is down in the US is true. The problem is, you don't put the real reasoning behind this. It isn't ONLY that oil prices are high, it is that peoples HOME prices fell. Their ATM is now cracked... thus less trips, less stupid purchases of SUV's when a standard car will do. When the economy begins its recovery from the financial bust, Oil will follow -- likely sooner due to the demand in developing nations.

    Also... do you think the Oil companies will LET this happen? Hardly. Many wells that have been brought online aren't productive at $60/barrel. Thus, when the price drops, they will go offline causing supply shortages again which naturally will push the price back up.

    In short, oil will go down a bit (maybe settling around $100 a barrel), but not to the extremes we've seen in the past.
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  •  
    Aug 15 09:55 AM
    Good luck with your "ludacris" claims.

    Too bad oil can't be profitably extracted at $60 a barrel at most drilling sites. Oil producers shut down production at these sites when the cost of producing exceeds the sale price... thus cutting off supply and pushing up demand.

    Did you go to college or do you even understand economics?
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