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Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

$80 Crude Oil Price is the New Normal Minimum

Commodities / Crude Oil Nov 07, 2014 - 10:36 AM GMT

By: The_Energy_Report

Commodities

Saudi Arabia has nothing to do with falling prices at the pump, argues Bob Moriarty. He sees falling demand as the culprit, driven by economic slowdown in China, Europe and the U.S. In this interview with The Energy Report, Moriarty explains why increased consumer spending won't solve our problems, and discusses why he's still a fan of North American energy stocks—even though he hates shale oil.


The Energy Report: Bob, thanks for joining us again. In your recent interview with The Gold Report, you discussed U.S. involvement in the Middle East and how it could contribute to a financial crash. Today, oil is in the low eighties. A lot of focus is on Saudi Arabia and the fact that the country is not pulling back on its production. Is this a price war to squeeze out the North American shale oil plays?

Bob Moriarty: No, that's not the case. The price of oil is going down because demand is going down. China is slowing down, and that's reflected in the price of platinum, silver, copper, iron and coal. It's perfectly natural for the price of oil to go down as well. I don't attribute falling prices to any malignant behavior on the part of Saudi Arabia. I'll tell you—Saudi Arabia doesn't give a damn about shale oil because shale oil is not economic. Anybody who can do basic math understands that. Everybody in the oil business is saying the math doesn't work. The majors are bailing out on shale as fast as they can. The wells are deep, expensive and last 2-3 years before depletion.

TER: So, U.S. energy independence. . .

BM: It's absolute rubbish. We are never going to have energy independence. We have much more coal than we have oil. Coal's been a disaster. Coal mines have been shutting down for the past several years.

TER: Has new infrastructure or technology, like fracking or horizontal drilling, brought down the cost of extracting oil?

BM: Exactly the opposite—it's increased the cost. It used to cost $30 per barrel ($30/bbl) to extract oil using conventional methods. Now it costs $80/bbl. No one is making money in fracking, not in North Dakota, Montana or Wyoming. They're all losing money because the cost of production has gone way up. Nobody talks about peak oil anymore, but peak oil is absolutely real. Below an oil price of $80/bbl, no one can afford to produce.

TER: Yet you're still a giant fan of energy stocks. What value do you see in the energy sector?

BM: I'm a giant fan of energy, food and water. The one thing we know is that cheap oil is over. The cost of energy is going to go up. The big opportunity in the next 15 years is going to be energy in any form. Food and water are analogs of energy.

TER: Are there specific energy stocks that are more interesting to you?

BM: Yeah, the ones that are well run, well financed and well managed.

TER: Can you give us some of your favorites?

BM: When I write about an energy stock, it's because I know the management. I met the people at Torchlight Energy Resources Inc. (TRCH:NASDAQ) when I was out in L.A. at a conference a few months ago. They're raising money, and the company is going to have a lot of money when the cost of projects and the cost of drilling come down. Torchlight is drilling in Texas and Oklahoma.

TER: Is the money being raised for drilling programs? The company recently bought a property in Texas.

BM: I'd like to see Torchlight increase its acreage and do drilling. It's a very favorable time because things have slowed in the patch. I actually like corrections. Everybody else wants to buy stuff at new highs. I'm not a big fan of that.

Another company I follow is Pan Orient Energy Corp. (POE:TSX.V). That company is kind of a tripleheader. It has projects in Thailand, Indonesia and Canada. All Pan Orient has to do is succeed in any of them. The stock seems pretty cheap to me now.

TER: You said that stock prices for most energy stocks have gone down, but you don't see them decreasing much further. Is that true for shale energy companies?

BM: A lot of guys in shale are literally going to go out of business. I will make it crystal clear: I am not a shale fan. The idea that shale is the salvation of the United States, that we're going to be the net energy producer and that we're going to start exporting oil and natural gas—it's bullpucky. Anybody who knows energy knows it's bullpucky. It ain't gonna happen.

We can expect oil from shale, but it's going to cost more money. I think that somewhere in the $75–80/bbl is the bottom for oil prices, but a lot of people are going to be hurt at that price. You want to look for companies that are well managed, with conventional oil in safe jurisdictions.

TER: A counterargument could be that consumer spending could go up, because people are paying less for gas and have more disposable income. Do you buy into that theory?

BM: Well, yeah. I mean, the natural way of economics is that over time, the cost of the things we consume should actually go down. Deflation is not a bad thing. Deflation is a good thing. If you look at the price of computers now compared to the price of computers 20 years ago, we get far more computer today at a fraction of the price. That's the way economies are supposed to work. Cheap oil hurts energy companies, but consumers obviously are better off.

TER: Would an uptick in consumer spending then trigger a downturn in energy demand growth in China, the U.S. or Europe?

BM: China has been on an orgy of inefficient spending for the last five to 10 years. There are millions of housing units in China that can't be sold. China needs a cleansing of its economy to restart natural growth. If China takes the same approach as the United States and Japan, and allows the government to micromanage, then that could turn into a full-blown depression. Governments never fix anything. Governments only screw stuff up. The idea that government is the solution to anything is a really flawed logic. We need the government to stay out of the economy as much as possible.

TER: If we're seeing decreases in energy costs and increases in consumer spending, what's going to trigger the crash you discussed in your last interview?

BM: We're not seeing an increase in consumer spending. We're seeing more efficient consumer spending. If you were spending $100 for a tank of gas and now it's $80, you don't necessarily go and spend that $20 difference. Hopefully you save it. Economies grow through saving, not through consumption. We created this idea that you could somehow consume your way to prosperity. Think about it for a minute. How are you better off by consuming? You're better off if you save.

There is nothing sacred about economies growing. We need economies that spend money wisely and economies that are based on savings rather than consumption. Growing economies are not necessarily a good thing.

TER: Anything else you want to mention in terms of trends and energy?

BM: I think we are experiencing a natural correction, primarily due to slowdowns in Europe and China, and it's perfectly natural for the price of energy to go down. I think $80/bbl oil is probably the new normal minimum.

TER: Thank you for joining us Bob.

BM: My pleasure.

Bob and Barb Moriarty brought 321gold.com to the Internet over 10 years ago. They later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Moriarty was a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam. He holds 14 international aviation records.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) Karen Roche conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Torchlight Energy Resources Inc., Pan Orient Energy Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Bob Moriarty: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Torchlight Energy Resources Inc., Pan Orient Energy Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
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