Are Oil Prices a Bubble? Figuring Out the Numbers

[On the Road]

I don't understand how to run numbers in the oil industry -- reserves, demand, supply, projections, etc. But I had an exchange with someone on Clearstation who does. AceStockPlayer is a daily poster on that site whose input is generally pretty good.

Whatever the long-term trend, if you're investing, the market is likely to react on news from the next year or two.

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From: AceStockPlayer Replying To: ribofunk (post 326) May 28 2008 10:13PM

Title: EIA forecasts--see for yourselves!

Here's the EIA historical report and forecasts of worldwide oil production and consumption through year 2009.
Notice that demand and production were about equally apart in prior quarters as they are now, and yet oil sold for a much lower price in previous quarters. Using EIA data, it seems to me that demand has not out-stripped supply any more than it did previously.

Also, take a look at the reserves shown at the bottom of the tables. The reserves are the cushion that make up for the difference when demand exceeds supply. For instance, in the next quarter (3rd), it is predicted that oil production will increase and that production will be greater than supply--not exactly bullish news for those who are long oil! (Also notice that the withdrawal number is showing as negative 0.73--that appears to be an error!--it should be a positive addition to world inventories of +0.73 billion bbls.)

(BTW, Unlike McG who claimed that the Wall St Journal was publishing false PE ratios, this appears to be a real misprint and one only has to do the math like Ace to see this--if someone believes I'm wrong, please explain.)

Now, also scan over to the right side of the tables where the EIA sums up world oil production and world oil demand for years 2007, 8 and 9.... notice the 2008 forecast is calling for a NET GAIN in oil inventories, albeit a small one (+0.12 million bbbls) as shown in "net stock draw downs," which is the difference between world production and world demand.

Now, look at the 2009 forecast--yes, indeed, the oil bulls do seem to have a case, by golly! Why oil is predicted to show a NET loss next year of -0.12 million bbls of oil. Tsk, tsk! No wonder we have $130 oil now...the markets always anticipate, correct?

Well, if so, then let's do the math to see how BIG our problem will be in 2009: Look at End-of-Period Inventories at the bottom of the tables...in 2009, it is predicted that the US will have 985 million bbls in reserve, and the OECD countries as a whole, which includes the US, will have about 2,587 million bbls in reserve. Now, take the net loss of -0.12 and divide it into the 2,587 reserve number, and voila!!!

...In 2009, (after the 2008 net gain), the world's oil inventories will be reduced by a whopping 0.0046%! Oh, lordy!

For next year's predicted depletion of world oil inventories of 0.0046%, we must pay $130 a bbl??? At this rate, it would take many, many years to reduce the world's inventories...

...Now granted, oil production is expected to recede in the years to come because it is a finite source and we have all heard about "peak oil"... but it appears to me like we are not anywhere close to the death-blow scenarios for at least several years to come, and with some conservation by everyone and new oil fields that could open in coming years (perhaps Brazil's new find in deep water?... perhaps the North Slope in Alaska will expand finally? ... perhaps the tar sands in Alberta which will be coming on line in a big way thanks to oil prices above $75... perhaps Iraq will increase its facilities with a McCain victory to triple its current 2.1 mm bbls a day capacity which could easily be done with a long-term commitment by US forces in Iraq)...

Let me put it this way>>> Look back at the past few quarters and the difference between production and consumption...there is not much difference in that disparity in the current quarter than there was in past quarters...and in those recent past quarters, oil traded at $50, $60, $80 or so a barrel...given the world supply-demand dynamic, the falling $ and the cost to bring it up out of the ground, I think most of us would agree that somewhere around $60 to $80 was a fair price....even a case of $100 oil can be made with a weak $.....

WHAT I WANT TO KNOW IS WHAT HAS CHANGED SINCE THE PAST FEW QUARTERS TO MAKE OIL WORTH $130??? From this EIA table, it seems NOTHING has changed, except a lot of speculative money has found its way into oil because it is perceived there are few other places to make money these days--certainly not in financials! Not in real estate! Not in CDS, money markets or bonds...Not even in many techs or other commodities...has anyone noticed that many commodities have come off their recent highs?

...it looks and smells like a BUBBLE to me...the only question is when does it begin to h-i-i-s-s-s-s-s-s-s-ssssssssssssssssssssssssssss!

-Ace (insert this link below into your browser and see for yourselves)

EIA Site

Original Post

[Captain Angry]

1. The only thing that has happened is that better investments haven't emerged.

As long as speculators don't have a better place for their money, it will stay in oil.

Dot-com bubble... pop. Money goes into real estate.

Real estate bubble... pop. Money goes into commodities.

Commodities bubble...

[On the Road]

2. Right -- I Think That's What's Happening, Too

One beneficial effect of the spike in oil prices is that investment money is pouring into solar and wind as well. It's volatile, but is generating a ton of interest on Wall Street and even has its own little bubble. I bought some LDK, fortunately at a reasonable price. Was also looking at WNDEF (or WND.V on the Toronto exchange), but have no idea how to value a wind company like this in the early phases.

[Captain Angry]

3. Valuation is difficult at that stage.

It's speculation right now for most of them.

Some companies have a great plan, and great funding. But without the right level of support from the Gov't, they're not going to make it. I mean, if you make solar/wind stuff, and the idiots in Washington give coal another subsidy...

From what I've read in the first 60 seconds, it looks like if nothing else, WND will have a nice real estate portfolio. Owning 3500 acres isn't too difficult. But they're working on it. They're already generating and reselling electricity. So they have cashflows. If I were considering an investment, I'd find out what they're thinking of doing. At this price, they're unlikely to have decent coverage, but there are ways to get it. Since they're public, if you haven't gotten and read the 10K, that's the next step. The MD&A section should talk about what their plans are.

But until the technology brings the costs down to the point they can compete with coal year-round, wind has problems.

As socialist as this sounds, I think that governments are going to have to nationalize their power system at some point. Take control of the grid, and buy electricity from who provides it at the best cost. That way they could install a thousand square miles of solar in Arizona, and turbines from hell in parts of North Dakota sunflower fields, etc.

Clean electricity should be a human right by the year 2008, and efforts should just be in cheaper cleaner generation and lower consuming devices.

[On the Road]

4. I've Looked at the 10-K and Other Documents

They're in the growing-but-still-need-money stage.

What I was hoping to glean from the documents, but due to its absence or my lack of knowledge was their cost per kilowatt hour and the current retail price. If they can break even with oil above (say) $70 a barrel, they have a great future. If it requires $150/barrel oil or a subsidy, they might go bankrupt waiting for government support from either the US or Canada.

I agree that government should be involved in energy, but it's difficult to do right. The current programs for ethanol and petroleum assistance are not models for the next wave of energy development. But once an industry gets major support, they become stakeholders, contributors, and lobbyists, and it's very hard to stop the flow. Carter's zero-based budgeting was the right idea, but not even he could implement it well. Hopefully, Obama will be in a position to do something about this. He seems to have good people around him.

[Captain Angry]

5. Being in electricity, their price structure isn't affected by oil.

Wind competes with coal. Nobody uses oil/gasoline for electricity generation on any large scale.

EVENTUALLY, and not soon enough, electricity will indeed compete with oil (gasoline). This as electric cars are produced again.

For this company to well and have sustainable growth, they need to be building cashflows and getting customers. They're on the right track with their land acquisitions.

Coal isn't going to spike in price, only the cost of delivery should affect it.

So, it's going to have to be local/state/federal governmental policy that mandates X% of renewable energy that helps a company like this. Unfortunately lobbyists are probably going to be able to convince some dumb politician that coal is renewable, just at a slower rate.

[On the Road]

6. I Was Going on The Understanding

that a lot of power plants sill use petroleum (or so I heard in the 90s). But coal makes better sense as a comparison point.

The point about requiring X% renewables is a good one. Then the appropriate analysis would be whether WNDEF is better positioned than its competitors geographically, politically, and financially to advantage of this regulation.

[Captain Angry]

7. That's what's nice about the grid.

They don't have to sell locally. But their land acquisitions around the continent will help them get access to regional coops.

I think the big thing is, if they're viable, some larger electric utility will buy them out. When that industry really takes off, we'll see so many little guys swallowed up into the Xcel energies of the world.

But it will sure help the share price.

[FogerRox]

10. about 52% of US electricity comes from coal.

[rdenney]

12. Where does natural-gas powered electric generation fit into this equation? nt

[funflower]

8. I guess it's time to invest in tech stocks again. n/t

[Speck Tater]

9. Can't use EIA forecasts.

The EIA has repudiated their own past forecasts and is in the process of re-evaluating and revising their forecasts much lower.

From http://www.energybulletin.net/44867.html

--quote--

For many years, the International Energy Agency has forecast that supplies of crude and other liquid fuels would increase with rising demand so that by 2030 world production would be about 116 million b/d. The IEA is not alone, for the US’s Energy Information Administration also forecasts that supply will rise to meet demand for at least the next 20 years.

Last winter the IEA, possibly under pressure from some member states, decided to undertake a comprehensive study of the 400 most important oil fields to determine the ability of the oil industry to keep up with rapidly increasing demand. Although the findings will not be released until November, last week the Wall Street Journal ran a front-page story saying that the Agency is preparing to issue a “sharp downward revision of its oil supply forecast.”

Several major oil producers such as China, Venezuela, Iran and Saudi Arabia are not cooperating with the study so the Agency will have to rely on outside estimates to fill in the gaps. The IEA has not completely bought into the notion that geologic constraints on world oil production are imminent; it emphasizes the lack of adequate investment necessary to maintain and grow production in the face of rapidly increasing exploration and development costs.

The US EIA is also reassessing its optimistic forecasts and is expected to release a new, more pessimistic, appraisal of world oil supplies this summer. The surge in oil prices over the last few years has finally triggered a change in attitude by many old-line energy supply forecasters. Release of more pessimistic studies later this year is likely to lead to better understanding of problems the world will be facing and perhaps more rational policies in coming years.

[tama]

11. So

Fact: Oil available for global market (= net export, what exporting countries export minus their imports) has been going down since 2005. For socio-economical considerations, 2005 was the PO. Production has been stagnant on "peak plateau" with China and India etc. (with heavily subsidised fixed prices) pushing demand on global market and producing countries (with heavily subsidised fixed prices) are using more domestically, not to mention countries allready peaked changing from exporting country to importing one (Indonesia, UK etc.).

Meanwhile: The megatrends since about 2000 still persist, with no end in sight; Fed is still pumping liquidity like last day (literally!) to save the financial sector, dollar is still dropping, gold going up, commodities going up.

Important to understand: for oil (and oil related commodities) to go down big way, supply should drop more than demand. Ain't gonna happen - on current peak plateau - as long as China and others stick to subsidised fixed prices. And even if China etc. start demand destruction by raising prices, there is the:

The Big Question: when will the plateau stage end and the production will start to really fall, by estimated 4-8 percent annually (for example, 4% drop in actual production and 8% drop in oil available for global market)? That is when - considering that we eat oil and PO means Peak Population - not only $200 but $500, $1000 etc per barrel are to be expected, together with increasing shortages.