From my perspective the collapse in oil prices was less predicted than the credit crisis which at least has several weeks of freezing credit markets ahead of it before the roof came in.
Now everyone is parroting the same story.
There is over production. Oil shales is pumping so much oil the world is running out of places to put it. Then there is the possibility of Iran being rehabilitated. Then there is the China slow down. Turn over another rock and there is another reason oil is going to be cheap for a long time.
This all works in my head and it looks great on paper, but some things trouble me.
Why are so many oil companies doing OK as far as the market is concerned? Many oil services firms are doing alright too. If oil is going to stay at $50 or less for years these companies are going to be in for a world of hurt.
How about Tesla. Does the whole electric car idea work if oil is $50 a barrel. At $100 a barrel it hardly covers itself in profit glory. Yet even after a nasty correction Tesla is still a glory stock.
So OK, the stock prices of these companies aren’t exactly thriving as far as the market is concerned but imagine other industries suffering a 50% cut in their selling prices. Those companies would collapse. Right now decent oil companies have not collapsed, they’ve taken a punch but it is not the KO that the price has taken.
So what could be wrong with this picture. Certainly oil is $50. There is no arguing oil isn’t half the price it was a few months ago. There is no arguing this is probably great news for everyone, but what about if this low oil price is a blip?
That would certainly explain the lack of devastation to oil producers and their support companies. Is the market saying, “nope don’t believe this low oil price has legs?”
It would certainly explain why Exxon, almost a dollar for dollar price analogue for oil last summer, is $85 a share not $50.
Exxon price suggests oil should be over $80 a barrel.
So is oil at these levels just a blip?
Low energy prices means economic growth, economic growth means more energy consumption. Just as high prices are the solution to high prices, so low energy prices should be the solution to low energy prices.
Then there is the thorny question of what is the REAL price of oil. While oil oscillates there must be a near stationary fundamental value for a barrel of oil.
The possibilities for such a valuation are endless but I get to a price my own way.
Human progress is built on a foundation of food. Energy makes food. Well not necessarily. If energy is expensive food gets turned into energy.
So food makes energy to me is about progress. Food into energy to be is about regression. Why is it regression? If the rich need to turn food into energy, then the poor starve. That’s pretty basic.
So where is the food to energy to food to energy pivot? $80 a barrel when I last looked. All the main food crops can be converted into energy at $80. So when the price of a barrel of oil is above $80 the world risks going into reverse.
Again the solution to high prices is high prices.
So to me the REAL price of oil is on the margin of $80 and the oil price should oscillate around this.
As such oil has upside.
Then there is the oil price chart.
The W of price collapses and recoveries looks a very impossible development indeed.
If you take note of charts it’s a strong pointer to rising prices.
So oil could well be oil is on its way up again, so make the most of it while you can.