Lower Oil Prices? Forget It

Since the recession, crude oil prices climbed almost 50% to slightly above $100 per barrel today. With new supply coming online all the time, thanks in part to the boom in hydraulic fracturing of energy locked in shale deposits, savants say oil prices should be dropping up ahead. Don’t bet on that.

The reason: Demand is burgeoning. The demand side of oil, about 90 million to 92 million barrels per day, is bolstered by the growing need in China, which is relatively underpenetrated compared to the current population, and the same situation holds in India, and probably in Indonesia.

Barron's had a cover article recently on the increased possibility of $75 oil because of technological improvements, potentially expanding the oil supply in the future. However, there is another side of the equation, which is demand. The Barron's piece missed how much demand will surge.

The largest oil companies all predict the majority, if not all of the rise in demand will take place in Asia. If you look at the projections of both supply and demand, it is hard to see how oil goes to $75, unless supply absolutely explodes. In addition, there is the problem of how oil gets moved.

Supply bottlenecks keep prices up. For the past six years, we’ve waited for government approval of the Keystone XL pipeline. The proposed 1,664-mile project would move oil from Canada to Texas. Investor T. Boone Pickens argues that the pipeline would make the U.S. less dependent on foreign energy.

Some in Europe want the U.S. to just start shipping liquid natural gas to help relieve the Continent’s dependence on Russia's Gazprom. Seems like a good idea, right? You would think President Barack Obama would endorse boosting LNG exports. Thus far, not so much. The problem is the leadership and its loyalty to an environmental constituency, which does not understand the strategic importance of energy.

To be sure, the obstacles are not all political. It takes five years to build the LNG terminals. The private sector is itching to get it done and has been for years.

Yes, the environment matters, and the future of the planet is important. No one denies it, and the oil companies work in nearly every kind of environment available. In fact, the engineers and scientists from the largest energy companies probably care as much or more about the planet then those who continually criticize them, including the pandering politicians.

One plus: The big oil companies are very smart these days about deployment of capital, which means they have the financial strength to ramp up necessary production, once officialdom permits it. Their continued efforts to trim holdings are occurring all over the globe. Royal Dutch Shell (RDS-B) is selling properties in oil-rich but violence-torn Nigeria, where its pipeline regularly gets sabotaged. BP (BP) is closing down a refinery in Australia because of lower-cost competition from facilities in Asia.

Once new production and refining capacity eventually comes online, supply will improve. But given the surging demand, not enough to send prices plummeting.

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Yale Bock, CFA, is the owner and operator of YH&C Investments in Las Vegas.

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