Saturday, October 02, 2004

Whose your oil daddy?

Oil hit $50/barrel this week. Who told that would happen? Thats right your ol' pal Bubba. On August 4th who told you to invest in Canadian tar sand stocks. That's right, Bubba did. Canadian Natural Resourses - up 33%. Suncor up 15%. Western Oil Sands up 18%. UTS up 33%. That is in 2 months, not this entire year.

This change in the oil market is not a short term blip. This is a long term structural change.

Now to be fair, a lot of the run up in the price of oil is due to the depreciation of the dollar against other major world currencies. (Thank you very much Bush Adminstration!!!) The run up in oil price is not nearly as bad, measured in Euros, as it is measured in dollars.

However, there is a structural change underlying the basis for oil prices. Demand is outstripping supply. The demand forecast for next year is that an additional 2 million barrels per day will been needed over and above this year's average rate. That is how much Kuwait produces. So to put the situation in simple terms, by next year another Kuwait will have to be discovered and brought on production to meet the world's demand. Oh, and the year after that, another Kuwait will have to be discovered and brought on. And the year after that. Ad infinitum.

Of course the situation is much worse than that, because many of the world's main oil producing areas are old, tired, and in terminal decline. So, to meet demand, new production has to overcome decline in older fields PLUS exceed the previous year's rate by 2 million barrels per day.

Anybody with any common sense can see the trend is unsustainable. It may not happen this year, or next year, or the year after, but sooner or later demand will outstrip supply.

My biggest worry is that the Democrats win the election, and then will be on seat when the crash occurs in this game of oil price chicken. The President will have very little effect on this situation when it occurs. And the American public will punish the current office holder severely when they can no longer afford to put gas in their SUV's.

Nuff said for now.

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