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$300/Barrel Oil Is Coming - Barron's Interview

by: SA Editor Eli Hoffmann September 07, 2008 | about stocks: ECA / SU / USO    
Eli Hoffmann

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Weeden & Co. energy analyst Charles Maxwell says $300/barrel oil is on the way - and will hit us by 2015. In an interview with Barron's, Maxwell highlights oil's uniqueness:

When it begins to disappear, there really aren't any good substitutes, which there are for so many other commodities. It's that lack of substitutes that forces the pricing mechanism to balance supply and demand.

Before you scoff at the notion, note that Maxwell correctly predicted the recent oil spike (well, actually, he underestimated its magnitude) four years ago.

Key arguments:

  • Oil's alternatives - coal and nuclear energy - are not viable replacements, the former because we lack the technology to burn it cleanly, and the latter because political wrangling has held up its development. This lack makes the U.S. vulnerable.
  • Political instability will keep prices elevated and resource nationalism will continue to stop oil-rich nations from opening up their reserves.
  • New oil fields tend to be lower-yield and in more remote locations.
  • Record world economic expansion has been predicated on the use of oil as the primary energy source. The only thing that will ultimately slow that growth is higher prices.

Maxwell likes tar-sands stocks such as Suncor Energy (SU) and EnCana (ECA). Aside from that, new yet-undiscovered technologies will make a killing for those smart enough to recognize them early:

There are going to be so many new companies and so many new technologies that it boggles my mind at the thought of identifying all of them. There are going to be a lot of new industries coming in and wonderful opportunities in the stock market.

:::::::::::::::::::::::::

  • While not as extreme as Mr. Maxwell, Richard Shaw thinks long-term price trends make buying the dips a winning strategy.
  • Not suggesting this will happen, Bespoke ponders what would be if the 'oil bubble' burst at a magnitude similar to that of the dot-com bubble or the homebuilders bubble: "For oil to match the Nasdaq crash, it would get all the way down to $32.06 by February 1st, 2011. For it to match the homebuilder crash, oil would fall to $31.40 by June 27th, 2011."

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This article has 70 comments:

  •  
    Sep 07 07:16 PM
    No one can predict the future....Read ...The Black Swan,or Fooled by Randomness.........
    Reply
  •  
    Sep 07 07:22 PM
    it's a black box
    Reply
  •  
    Sep 07 07:30 PM
    Any public firms with significant positions in the Bakken area?
    Reply
  •  
    Sep 07 08:09 PM
    this is nonsense. when the industrialized economies of the world can't afford oil who is going to support the price?

    predictions like this are worth less than the paper they're printed on.
    Reply
  •  
    Sep 07 08:19 PM
    Far be it from be to scoff at a respected prognosticator. But 2015, really ?
    I would love to know what is going to happen 7 hours from now, much less 7 years from now !
    Silly to ponder these things, when we have the treacherous, manipulated stock market to deal with on a much more immediate basis .
    Reply
  •  
    Sep 07 08:44 PM
    buyitcheap: WLL, EOG, BEXP. CLR are some names with presence in Bakken
    Reply
  •  
    Sep 07 08:48 PM
    This article entirely ignores the argument that natural gas would help to replace dependence on oil. Just because someone called it right once, doesn't mean they'll call it right twice. In fact, according to the article, he didn't even call it right the first time...
    Reply
  •  
    Sep 07 09:01 PM
    The future is indeed a black box. Very pessimistic view though. Maybe read this:
    www.economist.com/spec...
    Reply
  •  
    Sep 07 09:08 PM
    Hey Ricard, while this column may not have addressed natural oil in depth, the interview in Barron's did. Maxwell does not believe natural gas can replace oil on a large scale for purposes of transportation. I agree.
    Reply
  •  
    Sep 07 09:25 PM
    Wow, he predicated oil will rise four years ago. Definitely worth whatever he is paid x10!
    My call, Oil $3,000 barrel by 2015!
    Reply
  •  
    Sep 07 09:29 PM
    tough to say where oil goes long term.....in terms of price.

    But I can say that oil is getting heavier.....we are going to deeper waters, taking on more expensive projects....and exporting countries are all cannabolizing their exports with growing internal demand....and/or declining production aside from a few countries.

    in 5-7 yrs....$300 is easily doable.

    The deep sea oil fields will be getting smaller and smaller....mexico will be a net importer of oil....all new hybrids or NG cars will not be phased in to make up the lost amount of oil...etc.etc.etc

    Reply
  •  
    Sep 07 09:54 PM
    What about natural gas?
    Reply
  •  
    Sep 07 10:26 PM
    Weeden & Co must have a lot of money invested in oil?
    Reply
  •  
    Sep 07 10:34 PM
    Compressed Natural Gas (CNG) could serve as the stopgap for replacing some of the US imports. Perhaps this will buy the time necessary to develop the next breakthrough technology.
    Reply
  •  
    Sep 07 10:37 PM
    Natural gas, like Helium, is a natural byproduct of hydrocarbon aging that exists in limited supply and cannot fill the mass energy role you imagine. Propane, a man-made version of it, does not supply the same energy level for a given quantity...
    Reply
  •  
    Sep 07 10:41 PM
    The higher the better. This is a critical transition - and $300/bbl is where the money to do it will come from.
    Reply
  •  
    Sep 07 10:48 PM
    Helium?? Helium??? Helium is the result of the decay of radioactive isotopes or uranium and thorium in the Earth's crust. The reason it is found in natural gas is that the same rock formations (anticlines) that trap natural gas also trap helium. The formation of the two gases are by two completely independent processes.
    Reply
  •  
    Sep 07 11:54 PM
    One important factor determining the price oil was not discussed - the value of the USD. Could be worth 50% of today's value by 2015.
    Reply
  •  
    Sep 08 12:07 AM
    abolish the Fed, remove the Bush and Saudi petro-family from power and start caring about the middle class. Then invest a trillion in green energy, not war.Oil will go to $30 if the above happen.
    wallastoninvestments.c.../
    Reply
  •  
    Sep 08 12:31 AM
    Second that on the value of the dollar.

    Can we start using some other, more stable currency to price the oil in? Say... gold? Because the US government has obviously given up on the value of the dollar. And with the enormous budget deficits, never ending wars, and probably even more to come if McCain wins (as he probably will) dollar is going DOWN long term (although I am betting on it short term).

    Otherwise these statements mean nothing. Oil could be $3,000 in 2015, and still be 100 euros, or 1000 CNY.
    Reply
  •  
    Sep 08 12:48 AM
    I think Maxwell is underestimating the probability of an unexpected technological advance. Once oil passes $150, there will be huge amounts spent on alternative energy research. Someone might come up with a revolutionary game-changing technology sooner than he thinks.
    Reply
  •  
    Sep 08 12:57 AM
    Oil prices are a fascinating example of short term inelasticity and long term elasticity of demand[s]. In the short term, you live where you live, you work where you work, you drive what you drive, and the bus routes are what they are. Every one of those things is fixed in the short run . . . but variable in the long run. The recent price spike in gasoline did what no government policy could do-- forced consumers in a myriad of ways to rearrange their lives to burn less gas. This didn't happen immediately, but it did happen, over a period of six months or so. High gasoline prices which last for years will promote a radical re-ordering of consumer behavior.
    Reply
  •  
    Sep 08 01:04 AM
    High prices is not necessarily a bad thing. Remember, necessity is the mother of all inventions.
    Reply
  •  
    Sep 08 01:14 AM
    Croc - yes, high prices are cured by high prices, but will these new behaviors continue as prices fall? Aren't low prices also cured by low prices? I think any long term elastic impact would take a lot longer to manifest than 6 months. I would argue the recent drop in oil has more to do with the strengthening of the USD than demand destruction in the US. The govt should raise taxes on gasoline to keep demand low and spur alternative source development.

    Nicola - Exactly! Thanks for clarifying.
    Population growth is another factor the article did not mention. At current rates, the world pop.is growing by 1 billion people every 13 years. That is obviously bullish for oil and commodities in general. This recent dollar rise/commodity drop is a "golden" buying opportunity! Too bad I have no cash!
    Reply
  •  
    Sep 08 05:18 AM
    Oil. Its not a shortage of oil,but once again a shortage in shipping and greed. If you were to believe the crooks in the 80's then you are going to believe them now. We have more energy re-sources in america than anywhere else on earth. Has nobody asked why Japan gets all the oil off the north slope? Have you wondered why the Gov. makes us pay so much when most of the other countries subsidises there citizens. Europe gets most of its oil and fuel from Russia. And are we really gullible to think that asias use of fuel has driven up the price. Get realistic folks,when heads of oil companies are raking in hundreds of millions for themselves and leave us once again holding the bag. You havent got mad enough to ask the right questions, or are we once again just being sheep. Enjoy.
    Reply
  •  
    Sep 08 08:33 AM
    When US bombs Iran in the near future to take out their nuclear facilities, I like to see how much oil jumps. My guess its going to be the last thing Bush does in Office. To me 200$ is possible and we are not even running out of the stuff. 300$ means its going to triple, and I bet people will still be driving their cars. There is no political will to get us off the stuff, we are addicted. Yes I believe at 9 dollars a gallon, we will still use our cars; maybe only to get to work and back if we can move closer to work or quit our jobs. And don't forget about farming, they need oil, construction, manufacturing uses oil in plastics, buses, planes and so on. Plain and simple we are addicted to the stuff and will pay what ever.
    Reply
  •  
    Sep 08 08:50 AM
    you have not factored in new supply - high-quality syncrude from illinois/west kentucky high-volatile bituminous coal via 2-stage hydroliquefaction (wilsonville AL 1982-85).
    > jack
    Reply
  •  
    Sep 08 08:50 AM
    Buy the CanRoys before Imperial Oil, Encana etc. buy them all up at a massive premium. Collect major divs in the meantime. It is fall, heating season, people driving kids everywhere to school in big SUVs and minivans etc. Long PWE, HTE, AAV, PVX, PGH and for a nice conservative play, Brompton Eq WT O&G Fund (OGN.UN-TO) paying ..07c CN monthly owning 5% of 20 CanRoys.
    Safe country assets. Agree, Oil is here to stay for a long time.
    Chinese and Indians won't go back to bicycles, especially in the monsoon and winter seasons!
    Reply
  •  
    Sep 08 08:59 AM
    $300/bbl oil is easy to believe by 2015. I think this may even be another under-valuation. However, it is all based on demand of the developing countries (as well as the developed) and finding oild as Brazil has in its deep off-shore waters. However, the US needs to look at the French and UK model for nuclear energy. Technology has vastly improved since Three-Mile island and let's not even talk about Chernobyl. The developed countries should also spend more money on alternative energy research rather than the paltry sums now being fed into their public and private sectors.
    Reply
  •  
    Sep 08 09:09 AM
    Canroys are not safe. Never underestimate the ability of socialist governments to seize corporate wealth. Back in October of 2006, these Canroys took a huge hit when the govt. decided to tax the hell out of them. Check the charts. Many have never recovered, even though the price of oil has spiked. BEWARE.
    Reply
  •  
    Sep 08 09:30 AM
    test
    Reply
  •  
    Sep 08 10:16 AM
    The ignorance on the web is astonishing!

    $300/bbl oil is quite possible and likely before 2015. Here are two good reasons.

    1. Supply -- production is falling in Mexico, USA, Europe and Most of the Middle East. Increases from Brazil, Africa and polar regions are not enough to offset the losses. Russia is a wild card, but it is likely that their production is also falling. No amount of drilling can reverse geologically determined depletion. Who cares if you can get production from a stripper well from 10 to 20 barrels per day. The world needs 85,000,000 barrels per day!!

    Also, don't count on Windmills and solar to save you. They don't produce a liquid fuel. Massive penetration of electric vehicles is required first. This will take at least a decade to accomplish.

    Finally, natural gas in North America is neither plentiful nor available for transportation fuel. The nat gas producers routinely drill wells that deplete 20% per year or more. North America is on a furious treadmill to keep the gas flowing. Forget about LNG either. There are only a few terminals to handle the stuff and NIMBY is blocking the construction of new ones.

    2. Demand -- Despite $4.00/gal gasoline, demand is still rising in Asia and the Middle East. In fact, prices are quite low in the Middle East so demand will continue to explode! The Saudi's are going to supply their own market first! Worry about the USA secord or maybe even third.

    Even in America demand has only weakened from 22,000,000 bbls per day to about 21,000,000 bbls per day. This is in spite of $4.00gal gasoline. It will take $8.00/gal or $300/bbl to really knock out the demand.
    Reply
  •  
    Sep 08 10:37 AM
    Predicting oil supply / demand is nearly impossible, especially in the long term. Recent events demonstrate this quite well. The truth is, out of the hundreds of analysts out there, a handful are going to be lucky in their predictions, and will be hailed as prophets a few years later on blogs like this. Well, if the guy's still an analyst and not a multi-millionaire, he didn't have confidence in his own findings the first time around. The only thing sillier than guru-worship is talking about how some individual oil field is going to make the difference.

    Nikola, I second that opinion. The dollar is toast long-term and there simply aren't enough deficit hawks in the US to prevent it from happening. We're addicted to both oil and debt, and it is possible that both could be squeezed hard in the coming years. Don't expect the baby boomers to give up anything to help the country make the transition. We'll probably blame outsiders for our predicament and start some wars.

    As far as investing is concerned, oil is a fairly risky investment at $100. Remember the early 80's? The demographics and oil statistics all pointed to peak oil at the time. All the books and articles said the peak had arrived and then WHAM!, the oil investors got burned, as demand finally plummeted at the same time new supply arrived in response to the high prices. Oil didn't recover from that shocking drop for two decades. Remember... if the president decided to change the interstate speed limit back to 55 mph, demand would drop 5-10% overnight.

    If McCain wins, I might invest more in oil and defense stocks, as war against somebody will be inevitable, along with the resulting currency devaluation and oil price shocks. Long term, though, I'm looking at Asia, Europe, and Latin America.

    If Obama wins, oil could drop in response to the reduced geopolitical risk and the dollar could stabilize as balanced budgets actually seem possible someday. In this case, I would make a contrarian move into the same Asian, European, and Latin American equities as above, but I might get lower prices on them as money flows back into the U.S.
    Reply
  •  
    Sep 08 10:43 AM
    Nuclear is available once the foot dragging stops. Otherwise new technology must involve coal to be viable.
    Reply
  •  
    Sep 08 10:59 AM
    I agree with others comments that the author does not take new non-oil technologies into consideration. There is biomass ethanol and sugar cane ethanol, and non-food grade ethanol technology being produced today at competitive rates. This fuel can easily be integrated using current gasoline distribution. Why else do you think BP invested in VRNM? Unless they want to get at the patent and bury the technology. Look into it.
    Reply
  •  
    Sep 08 11:09 AM
    Yes, "Buyitcheap"...

    To answer your question, there is a public firm highly active in the Bakken oil area.

    Northern Oil & Gas, Inc. (NOG), www.northernoil.com/ 52wk Range: $4.27 - $16.40, currently at $6.16/sh.

    I do own some of this stock.

    famos, in Montana
    Reply
  •  
    Sep 08 11:17 AM
    Dave M. - an election was called yesterday in Canada and it appears the Conservatives will be elected back to office, who are about as socialist as Sarah Palin. The (Conservative) PM is also from Calgary and is campaigning against new taxes on the energy sector. Alberta did raise royalty rates, although they are still among the lowest in the world, and it bears mentioning that the size and speed of the oil sands development in AB is something that would likely not have been possible in the US with far more stringent federal environmental rules, and a more organized (and well-funded) environmental political movement. So while I would await the election outcome (Oct. 14th), Cdn oil and gas cos, including the royalty trusts, are probably about the best investment you'll find (look at COS.UN on the TSX - good assets and pays 11% dividend, or CPG.UN which is a Bakken (Saskatchewan)play, and pays about 7% yield).
    Reply
  •  
    Sep 08 11:33 AM
    Hey Folks,

    Trains, planes, ships, trucks, cars, etc. currently all run on some form of diesel. The key word is "diesel." Consequently, the near term solution is clean-burning diesel. The next key word is "coal." We can currently make clean diesel from coal,
    (a 200 year USA resource).

    Hitler fueled his military machine by this process 64 years ago because of the very same circumstance, i.e. Germany was cut off from oil.

    I'm not going to paint the whole picture for you, research it yourself. practicability will dictate and win out in the end.

    famos
    Reply
  •  
    Sep 08 11:36 AM
    Amazing we are using all that 'dirty coal' isn't it? Seen the price for coal lately? Oh now it's going to be called 'clean coal' by the Democrat party. And that is the problem you mention of it being a 'political' issue with coal and nuclear power. The American people can do anything and after the next four years of 'hoping for change' people will get off there asses and actually change Washington. I will vote for Ron Paul. McCain is a mental midget when it comes to the economy and Obama is worse then Bill Clinton when it comes to corruption. The gangsta's paradise? Nah. Not for me...
    Reply
  •  
    Sep 08 11:47 AM
    Dear iThinkLittle,

    Yes, we've seen the price of coal lately and it is still the cheapest energy commodity. And political parties aside, we didn't call it clean coal, we called it clean diesel. Two different entities by definition.

    By the way, we certainly, don't care who you vote for.

    famos, in Montana
    Reply
  •  
    Sep 08 11:52 AM
    Famos - one minor details is that Hitler had access to slave labour, which greately reduced the input costs - the problem with nearly all forms of alternative energy, from syncrude to wind and hydrogen is that it takes almost as much energy inputs as you get out (more in the case of hydrogen). Light sweet crude in places like Saudi (or Texas 50 years ago) gave you a ratio of 20:1 - that is 20 units of energy out for every one in - and those days of all but free energy are ending, which, whether we like it or not, will change the way we live.
    Reply
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