My musings on the economy, life, technology, business and things I find interesting.

Saturday, June 7, 2008

What's Happening with Oil

On my way to work last week I filled up my tank for the first time since last year (parked for the winter), the bill rolled in at $87. The first thing I did when I arrived at work was post it for sale.

Now I'd already decided to sell it, but the thought of trading down from 300hp to my 115hp civic wasn't that fun so i had been slow with the sale. Cars are grand wastes of resources, deliciously fun and exciting but not productive uses of money by many means.

The modern world doesn't run on fun it runs on energy, we are so dependent on cheap, easily accessible energy that removing it would basically take the planet back to the stone ages. Energy has allowed us to industrialize, to specialize, to move items, people and ideas across the planet cheaply. Globalization only works with cheap energy, higher shipping costs are already pushing some production back to North America, with wage arbitrage and emerging economy inflation this is likely to continue. Regression to the mean so to speak, wages will fall, standards will fall, people will consume less, have less and spend less and in India and China they will have more, spend more and do more.


Consider the following News and Stats

  • On Thursday StreetInsider reported that the Saudi Parliament Will Explore Production Cuts, more recent reports indicate this would be to conserve reserves for national use and future sale at higher prices.

  • Saudi Arabia is packing about 15 billion a month into their sovereign wealth fund

  • According to the CIA world fact book, the US imports 13.15 Million barrels a day which is about $1.7 billion flowing out every day, or $600+ billion a year.

  • Canada has the worlds second largest oil reserves, 179 billion barrels proven, mainly in oil sands.

  • Canada is a net exporter of oil, about a Million barrels a day, with consumption flattening and production growing, but still not even close enough to supply the US

  • Wall Street Journal Europe reported on Thursday that India and Malaysia are trimming long standing fuel subsidies, and their not the only ones. Malaysians saw a 41% increase in the cost of gasoline.

  • There are no real large scale alternatives that can be brought online to replace gas and coal fired plants at this point.

  • The world is a net reducer of nuclear plants, one of the few abundant energy sources that we can scale out realistically is still a faux pas.

  • On Tuesday George Soros said the following to a Senate committee: "There is a strong prima facie case against institutional investors pursuing a commodity index-buying strategy".

  • India, China and other emerging economies taking on more and more complex services, product design and manufacturing.



Supply-Demand Picture for Energy
  • Based on the stocks of oil services companies the markets are predicting heavy exploration going forward

  • Emerging economies are gobbling up oil at break neck growth rates

  • Western countries are cutting back a low single digit rates

  • North Sea Oil Production is down almost 20% from it's peak

  • From 2006 to 2007 Saudi oil production dropped almost 10%

  • Saudi's stated in 2005 that they could ramp up production almost 50% but this hasn't happened

  • Oil producing nations no longer seem inclined to flood markets to undercut alternatives such as the oil sands

  • Canadian natural gas production peaked in 2001 and industrial use is growing at 2.2%, with tar sands production being an increasingly larger user



Things are Changing
  • People have less access to credit, now the masses feel poor when the previously felt comfortable

  • Jobs are shifting overseas

  • Wages are being negotiated down

  • Energy is getting expensive and so are all the things dependent on it

  • People are cutting back

  • US consumer confidence is at a 16yr low

  • The SUV has lost its cache


Investing Operations
As you can see the news is a mixed bag, investing on it is tricky in the short term. The great thing about energy is there will always be a market for it, you just need to buy at the right price. If prices stay at these levels then there are bargains galore available on the markets, if the price of oil drops then the increased exploration and recovery costs start to eat into the margins and things may not look as great. The most important factor is the long term price action of oil and for that we'll just have to wait and see.




1 comment:

Anonymous said...

Apparantly rental car companies are charging $8 a gallon to fill up, make sure you top it off before returning!