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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 "No Amount of Bad News Can Bring This Market Down" Trades
    The problem with buying banks is that they have to keep paying dividends to remain attractive to anyone, and they have to maintain capital at acceptable levels. While regulators are clearly willing to fudge "for the benefit of all mankind", the shell game can go on for only so long. Eventually dividends have to be cut or in most cases eliminated altogether, or the banks will be so obviously insolvent that even America's see-no-evil regulators will have no choice but to intervene.

    I was starting to think about XLF at 22 and C was looking mighty tempting at 18. A few more percentage points down and I'd have been a buyer. But at today's prices the only way I can imagine making money on these guys is on the short side. You're right that the market isn't making much sense right now, and it's still true that it can remain so longer than I can remain solvent betting against it. That doesn't, however, encourage me to bet *on* it, either. I'm staying well clear of the "everything's going to be fine" plays and looking instead for value among companies that have had bad earnings figures but look good in a long-term stagflationary trend. You may well make money; good luck to you.
    Apr 25 10:40 am |Rating: 0 0 |Link to Comment |View article

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