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  • Oil Will Peak at $150-200 - Barron's Interview
    Leonard, electric cars don't solve the problem. How was that electricity generated? Probably by burning natural gas, since gas-fired plants provide most of the supply for peak load (i.e., they're the ones at which supply can be readily increased). It takes years to build power plants.

    Too many people are writing about the run-up in oil as if it has a single solution: we need more alternative energy sources, some say; others demand that we drill more; still others insist that biofuels are the solution. Yes, yes, and yes. WE HAVE TO DO ALL OF THAT AND MORE! The solution to this problem involves many components, some of which will be quite painful. On the demand side, much heavier use of more efficient freight transport (rail instead of trucking and air), getting most people out of cars and airplanes altogether and onto much more efficient rail and bus transit, and replacing the remaining inefficient cars and trucks with less fuel-hungry models. Higher-efficiency heating, cooling, and lighting equipment needs to be phased in sooner rather than later, and many cities and towns in energy-intensive climates need to shrink or be abandoned in favour of more temperate areas with lesser heating and cooling needs. On the supply side, the time to start building more clean electric plants is now. Those reductions in demand will eventually be overtaken by economic and population growth, so supply has to increase. We must figure out how to safely dispose of nuclear waste, or determine that we cannot and that fission is a blind alley. We must determine how much electricity we can generate using solar, wind, and tidal energy, then build out that infrastructure as far as practical. Biofuels are viable, but not all of them; we need to find the best way to make them without shrinking the food supply or expending more oil than we replace. We must increase exploration and drilling, especially for cleaner-burning natural gas, and we must learn how to get the most energy out of our massive coal reserves without choking the air with CO2, sulfur, and soot.

    Consider history as well: the 20 years following the 1980 spike top. From 1980 to 1998, the price of oil fell from $37 to $12; both years were highly anomalous. If we suppose that 2008 is also anomalous, that oil puts in a top at $150 this year, and that the same price pattern in 1980-2000 follows, the price would be at or below $75 in only 10 of the next 20 years. The average price in that time would be $87.11, the lowest $47.73 in 2026, and in 2028 we'd be at $109.79. Extend it out another 5 years from there and we'd be well on our way to $650.

    So is $75 possible? Sure, but I wouldn't expect it to last very long. Without major investment globally and especially in the US - in efficiency, demand reduction, increased oil and gas supply, and alternatives for electricity generation - and much tighter US monetary policy, the fundamentals will impose a positive tilt on that historical cyclical price chart and push the 20-year average well over $100 with a 2028 target of $200, even if $150 really is the top for this cycle. Then there's China...

    Thing is, a year ago, oil was $65 a barrel. When you analyze oil stocks, it's instructive to look at the year-ago price (when oil was falling after a 7-year bull run). In most cases, the market has already priced in a long-term fall back to the $70-90 range. There's plenty of room for the better producers to run here; every day that oil stays above $90 is another day of big-time earnings power that the market has not priced in. After 1980, it was 5 more years before oil fell that far (40%). You would have to be a legitimate oil bear (with 1-year and long-term price targets for oil below $80) to dislike today's prices on producers with the ability to maintain or increase their output. It's hard to like crude at $139 but there's surer money to be made elsewhere.
    Jun 08 14:26 pm |Rating: 0 0 |Link to Comment |View article
  • The Triple Play: Oil Addicts, The Credit Crunch and Deflation
    Got that right, mixter. If you don't like the price of oil, you should use less of it and/or buy stock in oil companies. You'd think people would understand that if you're consuming something and don't intend to stop, you are effectively short futures on that thing; if you expect the price to rise, you should hedge that out by building long exposure elsewhere. It's amazing to me that every car-owning American doesn't have a few hundred shares of some oil companies socked away somewhere. As an example, STO just paid out about $1.67 per share. If you use 2 tanks of gasoline a month, we'll figure that at $120. So 900 shares of STO would cover your gasoline bill, more or less indefinitely, regardless of whether oil and the stock itself go up or down. This is a stock that as recently as January could be had for $25; considering the fact that interest rates are negative, securing a lifetime supply of gasoline for a one-time investment of about 23 years' inflation-unadjusted cost at $22500 should look pretty attractive. As a bonus (and a big bonus it is), the more oil goes up while you hold it, the bigger your profit when you eventually quit driving and sell your shares. Similar calculations could be done with XOM or XLE or Canroys or even futures and options, depending on which risks one is willing or unwilling to take on. I guess Americans are afraid of or don't understand the capital markets; in the era of ETFs and easy access to every kind of security (and the constant creation of new ones) they offer plenty of ways to take on, or hedge against, almost any imaginable combination of risks.

    Instead of using the system we already have, they'll demand some boneheaded moves from Congress. This kind of reaction is why I find America so unappealing as an investment target. The people have no discipline and would rather whine and blame others than get their own houses in order.
    May 22 10:42 am |Rating: 0 0 |Link to Comment |View article
  • Dollar Doldrums Will Soon Be History - Barron's
    Dollar bulls never cease to amaze me. They offer no fundamental underpinning for their position but expect us to believe that the dollar will rise simply because it is historically cheap today, or perhaps because they simply wish it to be so. If you want to be bullish on the dollar on a 3-month or 12-month basis, fine - I'll look at your charts and I'll listen to your arguments about the Euro. You may even be right. But I've yet to see any argument that the dollar has a long-term future

    First, commodities. If commodities prices are all driven by speculation, one would see extreme contango in the spot market and 2 front-month contracts. Speculators do not want, and do not in most cases have the ability, to take physical delivery, so their only choice is to close out positions before expiration. If the price increases are caused primarily by long speculation, one would expect to see prices fall dramatically as contracts expire and speculators are forced to roll over their positions. Despite the overblown worries about lower-than-normal convergence, this is not happening. So unless stockpiles are rising rapidly as speculators are forced to accumulate assets they cannot use, the higher prices are being caused mainly by real supply and demand factors. In many markets stockpiles are at or near all-time lows, so if you want to assert that speculation is the main driver of today's prices you are effectively making a conspiracy theory argument; after all, all that metal, oil, and food that speculators bought up has to be stored somewhere (or destroyed by the people who paid for it), and it isn't in any of the places we'd normally know to look. The logic is simply too tenuous at this point, so I think it's safe to say commodities are expensive mainly because supply is tight and demand is strong.

    As for the dollar, the opposite is true. Supply is abundant, especially of dollar-denominated debt. America at all levels consumes vastly more than it produces, and this is reflected in the rapid growth in its money supply and in Treasuries outstanding. There is no sign that Americans intend to reverse this multi-decade trend, even as foreign central banks talk openly about holding fewer dollars in the future. While you correctly note that there has been no panic selling, it does seem safe to say that the rate at which foreigners accumulate Treasuries will decline in the future. It doesn't take a genius to see that interest rates will have to rise just to keep the dollar near its current strength and, indeed, this is already happening. If the Fed doesn't follow up by curbing the supply of short-term money, we could only expect higher price-inflation and a weaker dollar. I agree that the euro looks overvalued right now, but the idea that the ECB will cut rates soon seems unsubstantiated. If anything, Europe is looking a bit stagflationary right now as growth falls and inflation rises. The ECB surely knows that the way to beat stagflation is to raise interest rates, triggering a recession but also resetting inflation expectations. At worst one might assume they will try to hold steady and hope inflationary pressures abate on their own. Given the ECB's history, anyone hoping for a rate cut there is whistling in the dark. No matter what happens in Europe, Asia is already saturated with dollars and continues to run large trade surpluses with America. The only way they can limit further appreciation in their own currencies is by buying more American companies. There is a limit to how well this will be tolerated and to how many companies in a weak, stagnant economy can provide the returns these SWFs will be looking for. So I can only expect the dollar to continue its decline against the RMB.

    As the population continues to age and older, better-educated, more productive workers retire on state-funded and other pensions and are replaced mainly by poorly-educated immigrants, taxes and borrowing will spike as productivity tanks. This will surely happen in Europe as well as America, and indeed it will to an extent be a global problem. But the pattern continues to favour countries with younger but steady populations and strong investment in human capital and infrastructure. None of that describes America.

    In short, there is no good reason to think the dollar will rise significantly from here, barring a dramatic change in America's collective values and expectations. A dead-cat bounce seems a given, but only a sustained period of higher productivity, higher savings and investment, higher exports, higher taxes, and reduced consumption, credit creation, and government borrowing could see the dollar back to 90 on the index. From my view here in the trenches, Americans simply haven't the fortitude to do it, and in any case demographics and underinvestment are going to devastate this country. 3 years out, 60 is more likely than 80. Well beyond that, history suggests that the dollar has an inescapable date with destiny at zero. Expect most if not all other fiat currencies to join it there sooner or later.
    Apr 27 16:49 pm |Rating: 0 0 |Link to Comment |View article

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