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For reasons I've never understood, people love disaster scenarios. Tell them their portfolios will rise 7% this year and their eyes glaze. But say the world economy is teetering on the edge of an abyss and they jolt upright with excitement: "Really? Tell me more!"
The best scare story of them all has been about peak oil. At least as interpreted by many financial advisers, the peak oil theory amounts to the belief that $100-per-barrel oil is just around the corner. (All figures in U.S. dollars.) With expensive oil will come deep recession and — dear me — a complete re-engineering of our oil-guzzling, SUV-driving lifestyles.
Well, maybe. Now that oil has plunged 20% from its summertime highs, many are rethinking peak oil — and with it, their investments in oil stocks. The question is whether prices will bounce back or continue their descent.
I think oil is headed down, down, down. Barring war or political disruption, the evidence suggests it will oscillate between $33 and $65 a barrel, which means energy stocks have seen their best days, at least for this part of the cycle.
The numbers tell the story. Despite peak-oil hysteria, the U.S. Department of Energy estimates the world's proven oil reserves have doubled since 1980, from just over 600 billion barrels to more than 1.2 trillion. UBS Wealth Management reckons the most likely scenario is one in which supply will outpace demand until at least 2025, and perhaps well after. Yes, the UBS numbers factor in roaring demand from China and India. But UBS also assumes people will change their behaviour as prices climb. This is a fact that believers in peak oil rarely consider. But if oil were to get anywhere close to $100 per barrel, wouldn't you give up your SUV and look for other ways to heat your house? Multiply those decisions across millions of businesses and households and you'd see a widespread shift away from oil toward natural gas, coal, nuclear power and ethanol.
The math is simple: one barrel of oil contains about six times as much energy as a thousand cubic feet of natural gas. Assuming factories and other big users switch from one energy source to another, you would expect a barrel of oil to sell for about six times the price of a thousand cubic feet of gas. And for the past several years it has. But not now. You can buy a thousand cubic feet of natural gas for $5.40 or so, implying an oil price of less than $33 a barrel. (This analysis assumes that the upside in natural-gas prices is limited — but that's another column.)
If you still believe oil is going to $100 per barrel, try a little thought experiment. Imagine you are the president of one of those huge oil companies we all hate. If you truly believe oil supplies are peaking, what are you doing? In all likelihood, you're pouring huge money into exploration to find more of the black gold. You're also up to your neck in the futures market, buying contracts that oblige other producers to supply you with oil years down the road.
Unfortunately for the peak-oil camp, the big oil companies seem to be doing neither. The International Monetary Fund's recent world economic outlook found that they are actually spending less on exploration now than they did in the early 1990s. Meanwhile, the futures market is asking about $62 a barrel to deliver oil to you five or six years from now. That's more or less the price for delivery of a barrel right now. In other words, there's not a speck of the hysteria you would expect if big producers saw a shortage ahead.
Could this change? Yes, because oil prices, in the short run, depend more upon geopolitics than geology. If Hugo Chavez in Venezuela or Mahmoud Ahmadinejad in Iran decide to use oil exports to make a political point, all bets are off. But remember: politicians depend upon oil to fund their regimes and keep themselves in power. They're unlikely to slip a noose around their own necks.
I'm betting on companies that will benefit from falling oil prices. General Motors is already in the early stages of a turnaround that lower gasoline prices will only aid. Wal-Mart and Dell are going to benefit as driving and heating bills take less of a bite out of their customers' wallets. You're likelier to hit a gusher with these companies than with the current darlings of the oilpatch.
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