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Immigration See other Immigration Articles Title: $100 — The New Floor for Crude Oil In the midst of the news about the EU crisis, it’s worth pointing out that oil prices have quietly crept back over $100 a barrel. West Texas Intermediate is $102 as I write. Brent crude, which many argue is the more important figure, is $111. This is remarkable given how weak the global economic recovery has been. Also of interest is the fact that the price of crude oil has been trending higher, even while the prices of most other commodities have been drifting lower. Higher Trending Oil Price vs. Lower Trending Commodity Prices The US is the world’s largest consumer of oil. It’s not growing much. Yet there oil sits, with a three-figured handle. I think it is a sign that challenges on the energy front will prove more stubborn than in the past. One day last week, I found it interesting that the main two financial dailies I read every morning both featured special pullouts on energy. The Financial Times report had a number of good nuggets: This is the first year the average oil price is $100 a barrel. In real terms, it’s the highest oil price since 1984. US consumers are on track to spend $200 billion more on oil this year than in 2010. Exxon Mobil’s capital spending budget for the first 9 months — $26.7 billion — was a record. Supply is tight; production from non-OPEC countries (such as Russia) has been disappointing. The US is an exception. It is reversing a four-decade decline in production and imports are down to 50% of consumption, instead of 60% as recently as 2005. (Canada is increasing production, too.) Tight government budgets are leading to lower subsidies for alternative energy. The brunt of this will be felt most acutely in Europe. China is the exception; subsidies for alternative energy have actually increased there. The nuclear renaissance is still a long way off. One article discussed the various phase-outs going on around the world. There is a new enthusiasm for LNG tankers. Consider the portrait these bullets paint. To me, they speak to the challenge in producing enough energy to make a dent in prices. There are also some opportunities in these bullets — producing good old- fashioned oil still looks to be a good business. The Wall Street Journal called its report “Big Oil Heads Back Home.” Some main points: Oil is shifting its attention from the Middle East to the West — oil sands in Canada, deep-water oil in Brazil and the Gulf of Mexico and shale oil in the US. By 2020, shale oil and gas will make up a third of US production, which could shift power away from OPEC. (The Saudis are worried.) Smart grids are coming. There was an article about energy- monitoring devices and other means to increase efficiency and save money. Interesting article on Churchill County in Nevada, which is enjoying a boom in geothermal energy. Biofuel companies are getting into other markets, selling stuff for skin care and beauty products. (Biofuels, like other renewables, are in trouble.) US battery companies are having a hard time trying to survive as they get strong competition from overseas and the adoption of electric vehicles remains slow. Townsville, Australia, plans to lay a cable to take hydropower from Papua New Guinea, some 600 miles away. How China slowing its nuclear program over safety worries is creating opportunities for some firms. How “clean coal” is a boon to companies selling filters and other means to reduce emissions. This report was more focused on the ways in which people are changing their behavior, about how people are figuring out new ways to create energy and to get it where it needs to go. It’s also more about the frontiers of energy and how they will contribute meaningful slices to the pie. It also makes me think about how energy is as much about place as it is about any particular source. In Nevada, they can tap geothermal. In Australia, they are trying an innovative way to tap a river in Papua New Guinea for hydro-power. You can’t really say geothermal is a great energy source. It is in some places, yet it won’t work in others. Ditto, hydro-power. But these stories show you how innovative people can be. And they show you how things can happen that no one would’ve guessed even a handful of years ago. I mean, US oil and gas production up enough to threaten the Saudis? That would’ve been a surprising prediction not too long ago. Yet it’s happening. These stories also show how political energy is. Everywhere. Government policy has a big impact on the energy mix pursued. Big subsidies for solar, particularly in Europe, essentially built that industry to a point it would never have reached without the help. But now, with austerity measures and tight budgets, a shift in policy can destroy it. An energy investor has to keep an eye on a lot of things. Technologies change. Consumer patterns change. Government policies change. But the overall backdrop is pretty strong for the producers of energy. The most powerful evidence is the most obvious: Amidst all the turmoil and slow growth in the big markets of the US and the EU, oil is over $100 a barrel. Chris Mayer for The Daily Reckoning Joel’s Note: Even for a non-energy investor, understanding the dynamics of the sector can be critical to assessing opportunities that may or may not present themselves in other areas of the market. Energy sits at the base of just about everything and, for many companies, it is a fixed cost that is nearly impossible to get around. Without energy, not a whole lot gets done, in other words. That goes for primary, secondary and tertiary industries. So, how does $100 per barrel oil impact the rest of the market? How does it impact “recovery” hopes for the western economies? How does it impact specific sectors of those economies and the profitability of individual companies within them? Chris’s next Mayer’s Special Situations alert is due out in three days. In it, he combines the kind of top down macro-analysis you see above with the fine-toothed comb due diligence you’d expect from a top notch value investor, to bring you opportunities that escape most people’s radars. If you’d like to ensure you’re on his private mailing list before the next alert, be sure to let us know today. Here’s how. Post Comment Private Reply Ignore Thread
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