Monday, September 08, 2008

The calm before the storm.

This analyst predicts not only will things be calm, cool, and collected in the oil markets up to the election, but that there will be a year or so honeymoon afterwards, too. However, once Obama, I mean, the winner is settled in and all appointments are made and paybacks and favors called, I mean, various government offices are turned over smoothly to the new administration's people, things are going back to yucky - and beyond.

What $300-a-Barrel Oil Will Mean for You
Charles Maxwell, Senior Energy Analyst, Weeden & Co.

Maxwell has worked since 1999 as senior energy analyst at Weeden & Co., an institutional brokerage firm in Greenwich, Conn., having started as an energy securities analyst in 1968. Oil prices came down last week, trading at around $108 a barrel, but he predicts an eventual sharp move upward -- to around $300 a barrel -- owing to a lack of available supply. Barron's caught up with Maxwell recently for his latest assessment.

Barron's: What's your prediction for the price of oil over the long term?

Maxwell: I see it heading on an upward slope. Around that long-term line, there will be a lot of ups and downs. I thought the peak on this cycle might be somewhere around $100 a barrel, but it turned out to be a lot higher, more than $145 in early July. But like a child's blocks piled one upon another, you finally reach a point where at $145 they were beginning to sway. It had gone far beyond the fundamentals. So the questions are: 'What are the fundamentals and what should the price be?' The answers depend on where you are sitting and what you own.

Barrons: What's your view?

Maxwell: I would put the price of oil today at somewhere between $75 and $115. That implies quite a fast rise, given that we were averaging about $32 a barrel for West Texas Intermediate in 2003...

...There are three or four Saudi oil fields coming on stream, but there won't be any more low-sulfur crude fields coming on after the end of 2010. There's also the recession, which takes away some demand, but oil prices will remain high...

...We will see $300 a barrel -- or roughly $250 in today's dollars -- because oil supply will be so short. If you want that oil, that's what you will have to pay for it. That will be in 2015, after the peak of oil [supply]. But even earlier, around 2010, more than 50% of the non-OPEC world will have peaked in its production of oil so the dependence on OPEC will become extreme. That will give OPEC a chance, I'm afraid, to lift prices rather more quickly on us than they are doing today...

...There's also the issue of existing fields that are diminishing. The classic example is that in 1985, the North Sea produced 2½ million barrels a day from nine fields, compared with about 1.7 million barrels today from nearly 100 fields. We are running desperately on a treadmill on which it is very difficult to stay up, because they are not finding as many new fields as old fields are being depleted.

Barrons: At some point, doesn't it come down to lowering consumption or tapping alternative sources of energy?

Right, and we will probably do both. Ten years ago, 40% of the world's energy was in oil, versus 39% in 2006. It should reach 38% in the next five years -- and 37% three years after that. So oil is slowing, and I expect it will stop its growth around 2015, at which point the supply begins a slow retreat...

You may recall, Matthew Simmons, CFR and oil analyst, also gave around 2015 as when the $*%& would really start hitting the fan, but that doesn't mean everything will be peachy until then. I seriously doubt every person in America can buy an electric car in the next 6 years, or even the next 3 years - not with everything else in the Market the way it is. It just can't be done. So most Americans are going to muddle along with no real effort or even a plan for repositioning themselves for the fast-approaching time, long before 2015, when individual households will no longer be able to afford gasoline or diesel.

I hope you're not one of them, class.

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