Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Natural Gas Price Ready For An April Rally? - 8th Apr 20
Market Predictions And The Business Implications - 8th Apr 20
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Oil Crisis Set to Worsen as Crude Oil Exports Decline

Commodities / Crude Oil Jun 11, 2008 - 09:13 AM GMT

By: Money_and_Markets

Commodities

Best Financial Markets Analysis ArticleIn ancient times, when mapmakers came to uncharted territory, they would scrawl: "Here There Be Dragons."

Flash-forward to the 21st Century; oil markets went into uncharted territory on the charts last week. Friday's dramatic spike up was the biggest one-day move EVER. Morgan Stanley now predicts that oil prices could hit $150 per barrel by the 4th of July.


The dragons are coming to dinner. Are Americans on the menu? More specifically, are you? Today, I'll answer those questions and more.

Let's start with ...

How This Crisis Differs From Past Oil Spikes

If you remember the last two oil crises — in 1973 and 1979 — you might be thinking: "well, these things end eventually."

Maybe so, but there are big differences between then and now.

SUPPLY ...

U.S. production peaked in 1970 at about 9.6 million barrels a day. In 1973, we imported about 3.1 million barrels a day. So when the Arabs cut off our imported oil, it hurt, but we could adjust.

Today, the import/domestic production ratio has flipped — we import about two-thirds of our oil.

So when President Bush said we are "addicted to oil," that's only part of the problem. The real problem is we're addicted to foreign oil — much more so than in the past.

Gasoline Inventories

U.S. oil inventories have dropped 35 million barrels since March — our margin of safety is getting painfully thin. The most recent trend is particularly ominous. Crude oil stocks are down 5.8% in the last three weeks compared to an increase of 2.5% at the same time a year ago.

And U.S. gasoline inventories are falling off a cliff — down 11% since early March. They should have built up right before the summer driving season, but that didn't happen this year.

And DEMAND ...

In the 1970s, OPEC slapped an embargo on oil shipments as punishment for U.S. support of Israel (in 1973, Israel and Egypt fought the Yom Kippur War). The reason for oil stoppage was political — artificial. However, it caused real conservation in the U.S. By 1979, virtually all the big "full size" American cars were downsized. When the Iranians turned off the taps, it didn't hurt nearly as much as the first oil crisis.

With gas prices up 400% since President Bush took office, and American consumers feeling pain-at-the-pump, oil prices and energy independence will be dominant issues in the upcoming U.S. presidential election.
With gas prices up 400% since President Bush took office, and American consumers feeling pain-at-the-pump, oil prices and energy independence will be dominant issues in the upcoming U.S. presidential election.

And it went beyond cars. Conservation became the buzzword across America. President Jimmy Carter installed solar panels and a wood burning stove at the White House. Carter's energy saving measures were promptly trashed by Ronald Reagan when he took office, as the energy crisis receded in the rear-view mirror.

But America's conservation proved OPEC's undoing. When they wanted to sell oil again, we didn't need as much of it. And without American demand, oil prices plummeted.

This time around, the demand growth isn't limited to the U.S. or even the Western world. There are 10 million new cars and trucks hitting the road this year alone in China, and millions more joining traffic jams in India, and other emerging markets. OPEC is starting to realize that because of this new demand, they need us a lot less than we need them.

Asia is why global oil demand is growing stronger even though the U.S. economy is slowing down. In previous oil crises, a weakened U.S. economy dragged down the global economy and global oil demand.

But the International Monetary Fund just projected that even with higher oil prices the global economy will grow at 3.7% this year and 3.8% next year. Oil supply is growing at 1% annually at best. It's simple math ... and it points to higher oil prices.

The stark differences between supply/demand then and now explain only part of the uncharted territory we are now navigating. Here are the other three dragons coming to dinner ...

Export Land Model

1) Accelerating decline in net oil exports. Over the next couple months, I think you're going to hear a lot about something called the "Export Land Model", or ELM. This is a theory proposed by Jeffrey Brown and others associated with TheOilDrum.com, an excellent site for information on the oil crisis. Unfortunately for American consumers, more and more evidence is showing the ELM oil prophecies to be painfully true.

The ELM says that, after a country's oil production peaks, it will decline at a 5% annual rate (the blue line) at the same time that local consumption increases by 2.5% (the green line). Add blue and green together and you get the red line, which shows the decline in a country's next exports will reach zero nine years after peak production. After that, the former exporter becomes an importer.

We've seen this model hold true in the U.S., China, Great Britain and Indonesia. For example, China went from a net exporter in 1993 to importing four million barrels a day today ... with those imports projected to rise another 50% over the next 10 years.

Net Oil Exports
(Thousands of Barrels per Day)
Country Change in Net Exports, 2005-2007
Saudi Arabia -689
Russia +495
UAE +133
Norway -658
Iran -318
Kuwait +58
Nigeria -14
Venezuela -279
Algeria +134
Angola +701
Libya +224
Iraq -34
Mexico -396
Kazakhstan +169
Qatar +50
Total -424

The real problem is that many of the world's exporters are now at their peaks. Recently, the U.S. Department of Energy said the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices.

And that means much higher prices are on the horizon.

2) Catastrophic decline in Mexico. I know I keep pounding the table about Mexico. But the facts South of the Border keep getting worse and worse.

In April, Mexico's oil output fell to a nine-year low of 2.8 million barrels a day, mostly because of a decline in its giant Cantarell field. At current rates of decline, Mexico will become a net oil importer by 2016, and maybe sooner, according to Mexico's Energy Ministry.

And just last week, Pemex, Mexico's state-run oil company, said its oil exports would drop to an average of 1.40 million to 1.45 million barrels per day (bpd) this year. That's about 15% below last year's level.

Mexico is America's #3 supplier of imported oil. This is not only a crisis for Mexico — it's a crisis for us.

3) Resource Nationalism will tighten the screws. Americans sometimes act like other countries are sitting on "our" oil and they have a duty to provide it to us as fast and cheaply as possible. But more and more countries are realizing their oil is a national treasure, and they're starting to sell as little of it as possible at the highest prices they can. It's called Resource Nationalism and it is bad news for American consumers.

That's why ...

Elected president of Venezuela with a landslide victory in 1998, Hugo Chávez has been the subject of adulation and loathing both at home and abroad ever since.
Elected president of Venezuela with a landslide victory in 1998, Hugo Chávez has been the subject of adulation and loathing both at home and abroad ever since.
  • In Venezuela, President Hugo Chavez's nationalization crusade has forced out two of the world's largest energy companies and the OPEC nation is preparing a "windfall" oil tax to boost its share of profits from its fields.
  • In Russia, Vladimir Putin has used hook and crook to bring more than half of that country's oil industry under state control, grabbing properties and projects from large foreign oil companies.
  • Even our "good friends" in the Middle East — Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar — curbed their output by 544,000 barrels a day last year. At the same time, their domestic demand increased by 318,000 barrels a day (there's that Export Land Model again!), so, their next exports dropped by 862,000 barrels. In fact, net exports from Saudi Arabia, the world's biggest oil producer, have actually dropped by a total of nearly 1.2 million barrels since 2006.

Saudi oil executive Sadad Al-Husseini said last June: "There has been a paradigm shift in the energy world whereby oil producers are no longer inclined to rapidly exhaust their resource for the sake of accelerating the misuse of a precious and finite commodity. This sentiment prevails inside and outside of OPEC countries, but has yet to be appreciated among the major energy-consuming countries of the world."

The reality is national oil companies control 94% of the world's conventional oil and gas reserves. And they'll want more control in the years to come.

Billion Barrels of Oil

When it comes to bargaining chips, America is sitting at the table with a pair of twos, and there are others at the table with full houses, aces high. And they AREN'T our friends.

All in all, it's a recipe for much higher prices. Oil at $100 a barrel was a shock, and now $150 seems inevitable. I'd say at the torrid pace we're on, oil may hit $200 sooner rather than later. After that, could $300 or even $400 per barrel be in the cards?

Yes! As long as the world's civilization runs on oil, we'll pay whatever it costs. There are alternatives to oil, but they aren't ready yet. So how might your life change in the next year or two? And what should you do with your money? Here are a few ideas ...

Get ready for $5 gasoline. The average price of gasoline in the U.S. has already pushed past $4 a gallon, and if oil rises to $150 per barrel and higher, $5 gas isn't far behind.

Get used to bumpy roads. Roads are paved with asphalt, and that requires oil. The hike in oil prices so far has pushed paving bills up by about 25%, so cities and states are cutting back on needed road work. That means more potholes as you drive back and forth to work ... if you still have a job. When we hit $150 oil, it almost certainly means the U.S. will careen into recession.

Your neighborhood will have a lot of empty homes. About 1 in 11 American mortgages were past due or in foreclosure at the end of March, according to a report released last week. And it's not just the "high-risk" loans that are going belly up. The problems are across the spectrum. Heck, even Ed McMahon is facing foreclosure.

Higher fuel prices are going to squeeze consumers mercilessly, worsening this problem, and perhaps even doubling the number of Americans kicked out of their homes.

Prepare for heating oil shock. Heating oil prices could DOUBLE by the time next winter rolls around. If you heat with natural gas, you won't be spared — the price of natgas is going much higher as well. If you haven't already, you might spend this summer insulating your home as much as possible. There are probably even tax credits for doing so in your state.

Prepare for rolling blackouts. Our national power grid runs on natural gas and coal (and some nuclear power), so it might sound safe, but think again. Our natural gas supply is under threat, and it could be devastating for the American way of life.

Brace yourself for higher food prices. Globally, food prices increased 43% in the past year, and the IMF says about nearly half of that is due to biofuels. The effect was much less in the U.S. — 4% last year — but it's ramping up fast. Some estimates put U.S. food inflation at 9% currently and accelerating. Higher fuel costs are going to shift food prices into overdrive.

These are just SOME of the changes you may face as oil spirals higher. But you can protect yourself, and profit, by making the right investments.

How You Can Profit From the Coming Oil Boom

If you want a simple way to play the oil sector, you can always buy the Energy Select SPDR (XLE). This exchange-traded fund holds big-name companies like ExxonMobil, Chevron, and Valero.

However, for the really big potential returns in energy, you can't beat individual stocks and specialized energy funds. For timely advice and specific recommendations, I invite you to check-out my new blog on Money and Markets .

Good luck and good trades,

Sean

P.S. We're already racking up fat open gains on the energy crisis in Red-Hot Commodity ETFs , using ETFs that track both oil and natural gas. If you're ready to target fast gains in hot commodities ... if you are ready to come aboard before this profit train leaves the station ... call 1-800-430-3683 and tell the operator "Sean sent me," to get a special offer.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules