| January 6, 2015 | Archives | Unsubscribe | | | | |  | | | Peak Oil 2015 | | | - In defense of a much maligned theory… a short visit with an old friend…
- Don't panic! A 2015 forecast for the rebound of oil… and its implications for your portfolio...
- Then, Byron King on the short-term price trends in the oil market... and two ways to play it…
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January 6, 2015  Dear Reader, "The big story for 2014 was the crash of oil prices," writes a longtime friend and doom enthusiast James Howard Kunstler. "It is yet being celebrated in other bloggers' 2015 forecasts as a boon to America... No one -- with the exception of a few 'doomer' cranks -- wants to believe that industrial civilization is in trouble deep." Present company excepted. It's been awhile since we connected with Mr. Kunstler. We initially met him in the early 2000s, as we had inadvertently become armchair students of the "Peak Oil" phenomenon. As with the study of demographics and the aging of the West, the impact of declining reserves of light sweet crude on the global economic structure is a hard one to peg. Not that we haven't tried.  E-Day... the Day America Runs out of Oil (2006), hanging on the Wall of Fame in publisher Joe Schriefer's office. But this marketer's rendition of the theory, while eye-catching and thus achieving the desired result, is far too simple. Peak Oil is naively interpreted by its critics as the world oil supply coming abruptly to an end... and, with it, civilization as we have known it.
Well, not exactly.
"Despite the triumphal [propaganda] of the past few years, Peak Oil is for real," Kunstler reasserts. "It just manifests more strangely than most people thought, namely, the simple-minded idea that it would only show up as ever-rising prices. No, I made the point in The Long Emergency (2005) -- and other commentators did too -- that Peak Oil would manifest as volatility… since the actual moment of peak conventional crude around 2005, we've seen pretty wild oscillations in the price of oil."
The wild ride in oil prices, says Kunstler, is: "due to the harsh reality that the price people and enterprises can afford to pay for increasingly harder-to-get oil is less than the price that makes it possible to get it. This sets up a yo-yo-ing instability in economic performance that exacerbates even normal wave patterns in the business cycle (which are, in turn, aggravated by banks and governments' interventions such as ZIRP to suppress those cycles).
"Below $70 a barrel, the producers go broke; above $70 a barrel, the customers go broke. So the price wobbles up and down as financial Ponzis like shale oil are introduced onto the scene in the hope that debt finagling and mineral rights leasing scams can substitute for physics and geological reality.
"One trouble with this is that each violent oscillation generates more economic and financial destruction. Activities like motoring, aviation, manufacturing and retail are badly affected and the entire financial system is made more fragile by worsening increments. Most importantly, the cost structure of the oil industry itself gets battered to a degree that fewer companies can survive to produce the remaining oil." Mr. Kunstler, for a time, was a perennial favorite at the investment symposium in Vancouver we used to host each July. Jim cut his teeth as a writer for Rolling Stone magazine. About his 1993 best-seller, he says, "I wrote The Geography of Nowhere because I believe a lot of people share my feelings about the tragic landscape of highway strips, parking lots, housing tracts, mega-malls, junked cities and ravaged countryside that makes up the everyday environment where most Americans live and work."
The Long Emergency, referenced above, in his words is "about the challenges posed by the coming permanent global oil crisis, climate change and other 'converging catastrophes of the 21st century.'" Unbeknownst to many, he's also very good painter.  Kunstler's subject: iconic depictions of a consumer culture built on what he calls "the largest misallocation of capital in human history." If you're willing to put aside the simplicity of stark forecasts, Peak Oil continues to provide useful context for understanding what drives the energy market. What it doesn't do is define the short-term oil price. Our own Byron King explores that short-term trend in our guest essay below. Kunstler's forecast for 2015? "Oil prices creep back into the $65-70 range by May 2015. It is not enough to halt the destruction in the shale, tar sand and deep-water sectors. As contraction in the failing global economy accelerates, oil sinks back to the $40 range in October… "…unless mischief in the Middle East (in particular, the Islamic State messing with Saudi Arabia) leads to gross and perhaps fatally permanent disruption in world oil markets -- and then all bets are off for both the continuity of advanced economies and for peace between nations." We've posted several of Jim's forecasts on the Daily Reckoning site, here, if only because he'll make you think… Cheers, Addison Wiggin The Daily Reckoning P.S. The "Peak Oil" thesis also provides context for what's happening in the American oil patch… in effect, companies willing to buy up drilling leases and speculate wildly with other people's money. Stable shale companies believed they had technology that would produce oil at the higher price and make it worth it. But as with the tech boom that gave us the Internet and email... a lot of shifty behavior in the financial markets comes along for the ride. We'll dig into that mess tomorrow... P.P.S. "All the usual caveats pertain, but…" our own Byron King forecasts for 2015. "Low prices will stimulate demand... despite well-known inelasticity when it comes to oil. I expect prices to fall in January... and then pick up in midwinter; by June, we'll see $65-range oil. "Just enough to keep the 'strong' shale players going, and low enough to wash out the least efficient." Below, Byron gives an account of what's happening in the oil market right now… and, with that target in mind, offers a few ways to play it. | | | | | | | | | Prediction: Largest Economic Opportunity of the 21st Century It's only about the size of a small coffee pot.. But one expert calls it the "largest economic opportunity of the 21st century." It's already being used to partially power Google, Wal-Mart, FedEx and Bank of America. And guess what? The company that makes it could become one of the most valuable in the world. And hardly anybody knows about it. But here's the best part -- you can own a piece right now for only about 21 cents. | | | | | | | | The Daily Reckoning Presents... Especially during the holidays, cheap gas feels good. But, Byron King warns, you should be careful what you wish for…
****************************** | | | | What in the World is Going on in Oil Markets? | | | | By Byron King | | |  It's hard not to notice it at the gas station. Oil prices have plummeted. They're sitting at levels we haven't seen in years.
Of course, this is great news when you're filling up the tank. I saw one estimate that today's prices will put about $750 "extra" into the pocketbooks of every household in America. That's the equivalent of a national tax cut.
These low prices are also great news for businesses that depend heavily on oil. The bottom lines of airlines, trucking companies, even cruise ship companies will directly benefit.
For investors, however, the situation is a bit more complicated. The effect of low oil prices obviously depends on what's in your portfolio. One thing's for certain, however: Oil market gyrations touch everything. So you have to either figure out how to ride the train… or get crushed beneath the wheels.
How long can you expect low oil prices to last?
Yes, as a consumers, you want to see low prices at the pump. But for investors who've been riding the American fracking boom, are these low prices a death knell?
To address these questions, you first have to understand why oil prices have fallen so dramatically since mid-2014.
There's no better place to start than with an event that occurred this past Thanksgiving involving OPEC. | OPEC is essentially a cartel that works to keep world oil supplies stable (meaning relatively scarce) and prices firm (meaning high, for them). | You're familiar with OPEC and how it works, right? OPEC -- or the Organization of Petroleum Exporting Countries -- has been around since the 1960s. They're essentially a cartel, and they work to keep world oil supplies stable (meaning relatively scarce) and prices firm (meaning high, for them).
On Nov. 27, OPEC oil ministers met in Vienna. Their agenda? To set overall oil production quotas. But unlike in past meetings, something very different occurred at this gathering.
Expectations were that OPEC was going to cut overall oil output. This would halt the months-long slide in oil prices.
Traditionally, this decision has fallen on Saudi Arabia. By either raising or lowering output, Saudi Arabia has the ability to "fix" the world oil price. It's something they've been doing since the early 1970s, and it's given them control over global oil markets.
But in a shock decision, OPEC ministers failed to agree to cut output. Despite the fact the world's currently awash in black gold, OPEC will continue to collectively lift about 30 million barrels of oil per day out of the ground.
The effect of this surprise move was swift. Markets sold down crude to four year-lows, while shares in a global array of oil and oil service companies took dramatic falls.
What makes this such an astonishing event is that for decades now, Saudi Arabia has held immense pricing power over global oil. But with this decision, they simply walked away from it. Why?
For some time now, the Saudis have seen more and more traditional oil markets slipping away to overproduction and underpricing from competitors. So rather than surrendering more market share, the Saudis drew their own version of a "line in the sand."
In a sense, they've passed the ball to the "tight oil" industry -- U.S. and Canadian fracking plays and oil sands, basically -- to moderate world oil production in the face of falling prices.
This lowered price of oil has hurt many U.S. "shale" plays -- and Canadian oil sand plays -- by lowering their cash flow and slowing production growth. Hence the share price sell-off. | | | | | | |
| We're blowing the lid off six investments the richest of the rich have used to protect their wealth -- sometimes for centuries. These investments could not only protect your family legacy but in the past have returned as much as 4,344-9,897%. | | | | | | | | | Despite this, it should not give too great a cause for concern. There are many excellent oil companies and service plays. Nothing new was created from OPEC's decision, and nothing was destroyed. Meanwhile, global oil demand is still growing -- slowly, perhaps, but growing.
I recently contacted a list of knowledgeable people in the oil industry and asked them to shed light on what's happening and where it goes from here. I spoke with geologists, engineers, drilling guys, company executives, and big-time economists… And do you know what?
For all the market drama of oil price headlines and falling share prices, those on the front lines of the oil biz are remarkably sanguine. People in the field, and the companies for which they work, are adjusting. No one is panicking. It's going to get better, they tell me.
A senior scientist at a major oil service company, for instance, told me this:
The last thing OPEC wants to do is drive the price down for too long and force U.S. tight oil to be even more efficient. We can do that, you know. You want lower finding, development, and lifting costs? You want more price and production competition? We'll give it to you. OPEC is creating its own worst nightmare.
Economic growth typically takes time. This means oil demand tends to be "inelastic" (as economists describe it). It doesn't just spike up overnight, despite price drops. | Over 80% of North American tight oil projects on the boards are profitable with oil at $50–60 per barrel. | Turning to the supply side, most U.S.-Canadian oil developments are still moving, at least in the short term. Hardly anybody stops drilling wells while the bits are turning, or shuts-in flowing oil wells. Over 80% of North American tight oil projects on the boards are profitable with oil at $50–60 per barrel. So the relatively low current world oil price shaves some upside off profit margins. But industry wide, it doesn't strangle North American tight oil. So where does that leave the price of oil? Over the long haul, it is simply too valuable a commodity to stay "cheap." Any number of events could trigger prices to rebound. Libya could regress and cut back exports. ISIS could conquer a few more oil fields in Iraq. Insurrection could occur in Saudi Arabia… Anything could happen. If you're a motorist, simply sit back and enjoy the low prices! If you're an investor with exposure to energy stocks, my advice is to not panic in the face of short-term market turmoil. Panicked times are when great assets move from weak hands to strong ones. Yes, it's true that in tumultuous markets, you can't time things exactly -- especially picking exact bottoms. But you can focus on acquiring better positions in companies with great assets, taking advantage of beaten-down share prices. Here are two such companies that should recover and then some. Accumulate shares at current levels, as they are both in "bargain basement" territory now. Schlumberger (SLB: NYSE) is a superbly run company with immense earning power. One way or another -- organically or via acquisitions -- SLB is destined to expand greatly over the years to come. Core Labs (CLB: NYSE) remains a new gem, as far as I'm concerned. Six months ago, shares traded over $220 each. Now they're in the $110 range -- a 50% haircut. I've waited 10 years for this one to get cheap. Regards, Byron King for The Daily Reckoning Ed. note: A version of this essay was featured in the February issue of the Laissez Faire Letter. For Byron's research on a strange occurrence he's been tracking in China's gold fields, please click here. | | | | | | | | |  Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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