Wednesday, June 8, 2011

Oil prices will go down eventually

Neils Jensen believes that oil prices will decline in the long term.
As he made a call back in 2004 (when oil was at $33/barrel) that oil would be over $100 a barrel within the decade and got hammered for it, you cannot accuse him of being a status quo cheerleader.
Neils Jensen, Credit Writedowns, 3 May 2011 (hat tip NC)
There are essentially three reasons why I think oil prices will go through a rather dramatic correction over the next several years:
1.      Many investors who, in recent years, have added commodities to their portfolios as a hedge will ultimately be disappointed by the lack of diversification this asset class offers;
2.      Governments and regulatory authorities, both in Europe and the United States, have effectively declared war on commodity speculators, and the area will become subject to a lot more scrutiny and regulation in the years to come;
3.      A number of new alternative energy forms are in much more advanced development than many investors realize and will, over the next 3-5 years, become serious alternatives to oil, particularly as far as transportation is concerned.
The technology he lists are:
·         Extreme fuel efficiency
·         Hydrogen
·         Fast charging batteries
·         Power beaming
·         Thorium based nuclear power
·         Algae Oil
He gives a very good rundown of this technology, I would definitely use the link and learn more. 
He also references a Rick Bookstaber piece that also gives a valid reason for most commodity prices (maybe not pork bellies) to go down:
Rick Bookstaber, Credit Writedowns, 16 May 2011
Our demand for housing and transportation, two of the biggest commodity hogs, will be lower. McMansions will be totally passé. It should already be dawning on people that most all of our non-sleeping hours at home are spent in the kitchen and its adjacent family room. Living rooms and dining rooms are relics. When people internalize the fact that they spend most of their non-sleeping, non-bathroom, non-eating time in a ten by twelve foot space with their various experience machine prototypes, large homes will, by and large, go the way of cars with fins and chrome.
We obviously will not need to drive around as much, given that so much of what we want is delivered to us electromagnetically. And, getting back to real goods and technological advances, if we take the web-based distribution a few steps further, rather than having thousands of cars running from one store to the next, a couple of delivery trucks will ply the streets. So per-capita consumption of energy and resource-intensive infrastructure will decrease.
Switching back to Jensen, he ends by concluding:
I don’t really have any idea which of the new technologies will prevail and which ones won’t. But I am dead certain that at least some of them will - and within the not so distant future - and for that reason I believe oil is nearing its end of worldwide dominance as the primary source of fuel for transportation.
This in no way implies that I am now forecasting oil prices to drop to $30 within the next few months. In fact, oil prices could quite possibly go higher near term - potentially much higher, if the situation in the Middle East worsens.
However, the more research I do on alternative energy forms, the more convinced I become that a substantial part of the 55 million barrels of crude oil the world needs for transportation each and every day will be substituted over the next few years. Why? Because we have no choice. Six billion people will soon become seven and then eight or even nine. And they all want our life style.
What I really like about his post is that he is not waving his hands and making unsubstantiated claims.  He is making testable assertions.  If what he is talking about comes about, he may very well wind up being correct.  If it does not come to pass, he probably will not.  He also does not say that there will be no change, but implies that at least for one of our problems there are potential solutions.


PioneerPreppy said...

I don't know. None of the alternatives have anywhere near the same ratio of payout and many require rare earth materials which are... rare :)

Finding alternatives is easy, finding cheap ones is not.

russell1200 said...

His piece is to some degree about financial speculation. But his speculation does imply a certain less than catostrophic outcome.

I have another piece coming, more pesimistic, that actually would flesh out this scenario.

Many of these arguments require that we would use less energy in total for the argument to work. I don't have a problem with that assumption because it is testible. If it happens you will see it: to a small degree it has occured during our current economic downturn.

The expense of the new energy sources (when they get here) is also very testible. At the moment hey are either of limited scope, or more expensive.

So we need a major drop in resource usage combined with some large increase in alternative to match the "new" demand level. If you want to be sarcastic (not me!) you could say: "Wake me up when either happens!" LOL.