Here’s why: OPEC seeks $75 oil.  A free market price today without economic collusion might result in $25 - $35 oil.  The difference represents a tax on the American economy of perhaps $50 per barrel - which amounts to about $1 billion per day, $365 billion a year, or about half of the TARP.  That is real money which would be important for America to save.  Moreover, cheap oil would inflict major wounds on various political opponents of the U.S., thus potentially saving us even more money in military costs that might become unnecessary. 

Sicking the plaintiff’s bar on oil producing countries may not be the best way to fight OPEC, although it did succeed in defeating both big tobacco and car safety problems in years past, so I wouldn’t discount it.  But it seems clear that Team Obama will have a substantial interest in finding some way to do it - whether by anti-trust legislation or with new conservation technologies or something else - whereas the Bush administration did not even seem to share the objective of reducing the price of oil.  So there may be a new player fighting for lower oil prices.     

Evidence of the conflict now raging between OPEC and market economics is the huge and growing amount of oil in storage.  Speculators, believing that OPEC will be successful, have bid up the future price of oil to substantially more than the current price.  That makes it profitable for other speculators to hoard oil on land and in dozens of tankers floating on the seas and to sell it later at the higher price.  The difference between spot oil and oil in February 2010 is now about $25, a significant premium.

Of course, if it becomes clear that OPEC will not succeed in withholding enough cheap oil from the market to raise the price then all that inventory in storage could come onto the market and possibly crush the oil price below even the $25 that is required to compensate the producers of easily and cheaply produced oil. 

From the viewpoint of oil-related investments it looks like we’ll have one of two outcomes.  Either OPEC will fail and oil will trade in a $25 - $40 range based on marginal production costs or it will succeed and oil will trade in a range closer to $50 - $75.  Either way, it’s unlikely that oil will begin trading on a marginal demand destruction price curve until a few years after the end of the global recession. 

If OPEC loses oil related stocks could fall even further; if it wins they would get a boost, but it could be a temporary boost depending on the depth and length of global economic weakness.  Eventually I will want to own a lot of oil (and I do own call options on oil in 2013 and 2014).  But at this point I don’t think it’s a good idea to bet that either OPEC will win or that the economy is fairly close to making a bottom.  So I own few oil equities now.      

I’m invested in two oil income stocks (Linn Energy, LINE, and Enerplus, ERF, and in one “special situation,” Petrobank (PBEGF), a company that combines a very successful conventional oil and gas E&P operation with a new technology for recovering very heavy oil deposits such as from oil sands at far lower operating and capital costs and with much higher quality and reduced environmental impact than the standard SAGD recovery method.   Petrobank’s new technology is starting to become proven and to obtain adherents, including its first licensee, and the company could generate substantial royalties in the future as well as a better way to develop its own oil sands properties.  My sense is that the potential breakthrough quality of this technology could lift Petrobank’s valuation even in a terrible market. 

Eventually a time will probably come when there will be too little oil, as was the case in 2007 and 1H08.  It will emerge from some combination of higher demand and lower supply.  Oil demand will most likely rise because of economic growth despite governmental attempts to limit oil use.  But even if oil demand were not to rise substantially beyond its recent 86 mb/d peak, oil supply will begin to level off and then decline, probably a few years from now, since decline rates for old fields are increasing and the number of new fields within view over the next decade is limited.   Moreover, most new oil waiting for development will be very expensive to lift, so even if the market is not supply-constrained the price will have to work itself well over $100 per barrel.   

Exactly when there will be too little oil available to supply the market is unclear for a lot of reasons including both supply and demand uncertainties.  My guess is that tightness in the oil market may resume sometime between 2012 and  2014.  Oil related stocks will rise as soon as there is a hint that the fall in oil demand may be over, which could happen anywhere from late 2009 through…whenever.  I expect we’ll see that before 2012 and I hope it is well before then, of course.  I may well want to own more oil stocks by the end of 2009.

Natural Gas and Alternatives

Natural gas is also not a place to be, but for different reasons.  As I’ve written previously, North American natural gas has become abundant for the foreseeable future due to enormous discoveries of unconventional supplies combined with the evolution of new techniques for harvesting them.  I don’t know what will make the price of natural gas go up.  I doubt we will see a lot of natural gas powered cars, though there will probably be substantial growth in truck fleets, especially ones with local routes, as mentioned above.  Perhaps a market will develop for natural gas exports from North America to Europe where supply/demand dynamics are much more positive, although there could well be substantial U.S. political blowback preventing that. 

What about alternative fuels and energy efficiency?  I think ethanol is a fraud. Obama’s apparent support for it is the one thing that worries me about his energy policy.  Other alternatives such as cellulosic ethanol and bio-diesel do not seem scalable at present - one day they may be, hopefully.  Renewable sources of electricity - solar, wind, and geothermal - are really not vital for reducing oil use.  Rather, they are being propelled by legislatures that want to reduce coal use.  I’m not hugely excited about their investment prospects although I suspect that some companies in this space will eventually prosper.    

Reducing oil dependence really boils down to batteries.   What this country needs is a good, cheap battery.  My farm team of stocks includes a few companies that may benefit from hybrid and electric vehicles.  We are going to get more hybrids, plug-in hybrids, and all-electrics on the market.   But with $2 gasoline - perhaps going to $1.50 - not many people will buy them.  That fact, plus stock market conditions make battery investments less than totally compelling right now - though they would be great candidates for “hot stock” status if the market were to turn around and Team Obama were to implement the right policies. 

I think, from a long term energy policy viewpoint, people should buy hybrids and especially plug in hybrids.  America would be better off if more people would buy them.  But many hybrid and electric cars don’t make a lot of immediate economic sense to an individual because of their high cost.  That’s why I hope that Team Obama will put in place sales taxes on low mileage vehicles and federal rebates for buying high mileage ones.   Or a tax on carbon or on gasoline.  Or all of the above. 

Other Interests

Apart from our traumatic investing and economic conditions, I’m enjoying the milder-than-normal winter climate here in northern California where I am visiting on an extended basis.  I’ve never before spent much time here but recent months have been extremely pleasant, particularly because they have given me the chance to enjoy more time with my son who moved to San Francisco a couple of years ago.  I’ve also enjoyed the instruction of a marvelous Palo Alto tennis clinic staff that has transformed my pathetic forehand into a mildly effective offensive threat.