Posted on 03/06/2014 4:21:03 PM PST by rickmichaels
It’s easy to get lost in the incremental gyrations of oil prices. “Oil rises on colder weather,” screams a headline one day, only to be followed the next by “Crude edges down on inventory report.” When not being driven by “fears over the Middle East,” crude is being hammered by “weak Chinese data.” You’d almost think energy analysts have a roulette wheel of explanations they spin each time prices move a notch: “Well, what will it be today? Oh ho! Emerging market turmoil it is.”
Which is why it’s so refreshing—and to be frank, scary—to talk with Bob Hoye, the Vancouver-based financial analyst, professional crisis spotter and student of the long view. Ask Hoye about where oil prices are headed and you’ll be taken on a journey through the coal panic of the 1860s, the collapse of the late-19th-century bubble in whale oil and the energy crisis of the 1970s. Hoye has a knack for looking past the hype in any market and determining when mania has reached a fever pitch. In 2005 he began warning of a recession on the horizon. By mid-2007, when most forecasters expected a mild correction in U.S. house prices, he predicted, “This is likely the biggest train wreck in financial history.”
So what does Hoye see coming down the pipe for oil, that sludgy lifeblood of the Canadian economy? “Somewhere in the next couple of months the price advance in crude will probably have maxed out for this business cycle,” he says. “It’s easy to say that crude oil could fall to 25 per cent of its recent high. It will change things enormously.”
There are several elements to Hoye’s forecast for a 75 per cent drop in prices, but let’s focus on just a couple. Perhaps most important is the energy revolution under way around the world. You’ll have heard of peak oil, the theory dating back to the 1950s and embraced with great enthusiasm last decade, that petroleum extraction will hit a wall as recoverable supplies run out. You’ll also notice you don’t hear much about it anymore. That’s because new discoveries and technologies for extracting petroleum, like hydraulic fracturing, have sparked a boom in production. The U.S. is on track to produce more oil this year than at any time since the 1980s.
A similar story has played out in natural gas. Barely a decade after America feared it was running out of recoverable natural gas, the U.S. is now producing more than it has at any time in its history. The result has been a collapse in prices, from around US$15 per million British thermal units in 2008 to below US$3 by 2012. (The price has recovered to about US$5.) Yet despite the sharp rise in oil production, light crude prices have mounted a bumpy climb from their post-recession low of US$34 a barrel to around US$102 today. If Hoye is correct, that price could soon tumble to around US$25 a barrel, invariably bringing the price of Alberta crude with it.
The second part of Hoye’s forecast rests on the craziness playing itself out in the futures market, where, as the name suggests, traders place bets on the future price of various commodities. While America’s energy revolution has been under way the past few years, he notes, large speculators have continued to believe oil prices have nowhere to go but up. Hedge funds and institutional investors have taken the largest net long position on crude in history, meaning they’re more bullish that prices will go up than ever before. Yet at the same time, commercial traders, who represent companies involved in the production and consumption of crude—and who use futures to protect their profits against falling prices—have their largest net short position in history, meaning they expect prices to drop. “These markets get distorted when you approach a top,” he says. “We’re at a point where it’s close to changing.”
It hardly needs pointing out that a price drop of the magnitude Hoye envisions would be crippling for Canada. While oil sands producers have pared their operating costs in recent years, they would be hard pressed to turn a profit with oil below US$30 a barrel. Nor is it clear the controversial Keystone pipeline would get built, even if Washington were to end its dithering and approve the pipeline’s construction.
Sometimes it’s necessary to step back from the day-to-day noise in markets to assess what’s really going on. But be warned, you might not like what you see.
Exactly. It’s not an oil price issue at all. The two are disconnected.
Right. Fracking not viable sub $80/bbl
I'm with you though, the prices can go down, it won't hurt my feelings any.....
Regulated Sulfur level differences make a partial explanation, but that and inherent energy content differences and taxation differences still don't make an 100% explanation.
Realistically, crude is not that expensive when relatives cost increases of everything else are considered. Especially when the cost of production is also looked at.
The cost of crude has a lot less to do with the cost of gasoline than it used to. And the cost of gas is how most people judge oil or energy costs.
Lower gas prices? Throttle the damn government. That is driving gas prices. The EPA and it’s unconstitutional mandates.
They’re having a price war in Sharon. Its 40 cents cheaper than the neighboring towns. A new Speedway started it.
I assume most of it is that we can export diesel which has high profit margins overseas.
Can’t export crude, but ok for refined products.
This has details:
http://www.cnbc.com/id/100943620
But if it tanks, new production will stop—especially the more expensive kinds of production.
There, it could just be demand driven by Big Trucks and all the Turbo-Diesel pickups....
Did you think I was suggesting that?
It was only $o.13 when i was in high school and only got to $0.26 until 1974 when a rediculous story in the Los Angeles Times caused a nation wide rush to the gas stations and emptied them causing the price to jump to $0.78 overnight.
even in my teens,i can still recall seeing a caption in the news before a commercial,it read “Gas,75 cents a gallon?”.
When QE infinity stops, the price will come down.
I think there’s a simpler explanation. imho the price of oil is set worldwide while the price of natural gas is set locally. the world wide demand for oil is rising pretty steadily as more and more people enter the middle class and get cars. that’s not going to stop. meanwhile most of the world’s oil fields are old. they can barely keep up with their declines. only Iraq outside of the USA and canada is getting a big bump in production to keep up with world wide demand. while the USA is enjoying a fracking boom—it will be five years or more before other countries master the technology and bring enough volume to market to make a difference. imho the only thing USA rising production is doing is putting a cap on price rises. There will be a collapse in oil prices — just not in next couple years. These are boom times in the USA oil patch. Oil/gas is currently adding about an additional 400 billion to the economy. that number will rise to 1 trillion annually in 3-4 years.
You are also paying road taxes that do not go to fix roads. You are paying extra because the tyrants in government have locked up easy oil on our on government owned property. Chickenpooper Colorado’s top tyrant has added restrictions on methane release and unrealistic demands for cleanups. A drop of oil can close down a site and require calling in a cleanup crew while split gas in a filling station is ignored.
You are so correct. You tell a dummy that and they don’t believe you.
I’ve been wondering why gas prices are still high with the new oil boom in North Dakota and Texas. Do the feds really have that tight a control on the energy market?
(Now Mr. Obama is even taking credit for the energy boom, though we all know he did everything he could to prevent it.)
Whoops, thanks fanfan!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.