Value Taking Opportunities, page-27

Just some thoughts on the forward price of oil. Sorry post is not properly referenced, I baulk at the thought of trying to dig up exactly where all this came from.

1. At the time of the Hardman takeover the perception was that of rising Asian demand and ever increasing prices due to the "peak oil" paradigm.

2. Recently it has been more the reverse with a perception of falling Asian demand and the "peak oil" paradigm being replaced by one of "peak demand" ie ever falling demand due to technological efficiencies and the move towards increasing reliance on non fossil fuel energy sources to stop the cities of the world of the future from being under water so to speak.

3. Although companies that have borrowed heavily on the assumption of continuing high prices are obviously vulnerable now prices have fallen, one cannot, I think use arguments in the longer term that prices must rise to meet past breakeven points for most current producers as, like for FAR this breakeven point is continually being revised down. You can't have it both ways. Somehow oil companies seemed to survive in profit for the long period between 1986 and 2002 when the average inflation adjusted price of WTI oil was US$32, just the same as the current price (google macrotrends).

With respect to (2) above, I had thought that falling demand should be already evident in reduced petrol consumption as a result of technological engine efficiencies, but to my surprise on looking into this I found that average petrol consumption has remained unchanged for years. All the reduced fuel consumption has achieved is, at least in the more affluent countries (while they remain affluent) is people buying cars with bigger engines and more power. Whether that will continue or be the trend in the less affluent countries I don’t know.

With respect to the move to electric cars and if and how long this will take, any increase in oil consumption at source to provide more electricity (if it is used for that) will be very much more than offset by the loss of consumption by the vehicles themselves. So as I read it, if that ever gets going in earnest it will indeed be a big negative for oil. Personally I hate the thought of electric cars, I just like my petrol engine.

Then I get an email from some investment guru telling me that the future lies in Solar, that costs and efficiencies for the same will plummet to make it far cheaper than oil (like US$5 equivalent of lower) due to technological advances in the pipeline (which I should be investing in), and in which the Saudi’s themselves are apparently heavily into.

After all that though, what I do know is that, looking at the macrotrends long term chart again, following previous falls of the degree we have seen recently there has been a history of rebounds in the shorter term (ie the 1 – 2 year timescale) and if this doesn’t happen again the chart will look very strange and lopsided to say the least.

pj