$145 for oil in December 2016, as the futures market is prices, does
not mean that the price of crude oil will be $145 in Dec ‘16.

Currently,
oil is at $131.25 for delivery in the month of July. If I contract to
buy oil from a supplier, in the year 2016, I effectively have paying a
higher price than today for “storage” costs. The price structure where
nearby prices are cheaper than deferred prices is what we call
contango. This is normal and not indicitive of a bubble. It means
supplies are adequate.

When that price structure changes,
whereas nearby prices are more expensive than deferred prices
(backwardation), that is a bullish market. Effectively, the market
punishes those who sit on supplies. It brings available supply to the
market by making it a losing proposition to store supplies.

Looking
at the current price structure, the market is backwardated from ‘08 to
‘12 and then in contango. The market is very concerned over available
supplies in the market for now, largely due to increased demand and
stable production. There certainly is more oil in the world to be
tapped, but it will take time to bring it to the market.

As for
US prices, we are perhaps the only country in the world with known
existing supplies that the government forbids oil companies to explore.
Our own government forbids exploration and drilling on the outer shelfs
over the Pacific and the Eastern gulf of Mexico where large quanties of
oil and natural gas exist. Oil companies are also barred from exploring
oil shale in Colorado, Whyoming, South Dakota, and North Dakota.

This country has a 250 year supply of coal, but we hamstring the new construction of even clean coal power plants.

We have the energy reserves but the US government needs to get out of the way.

Supply in the US might be near average levels, but oil is a global
commodity. A supply disruption in Nigeria impacts global prices. A
refinery outage in France cause prices to go up in the US because it
reduces the availability to import refined products (which is a
bottleneck in the US). By the way, oil traders don’t care about Kenya,
its Nigeria or other oil producing countries in Africa. That said, if
tension in Kenya might spread into Nigeria….

As far as ‘speculators’ are concerned, we can make money selling markets, too, not just bidding up prices endlessly.

Essential
raw commodities must be priced by the marketplace. Will prices go too
high or too low on the fringe, sure, but that is how prices are
discovered. How many consumers were complaining when a gallon of gas
was $1.00? Price too low? Well, there wasn’t enough incentive for oil
companies to invest in more production. So when an supply shock
happens, prices have to rise to provide an incentive to produce more.

During
all the 90s, food prices were so low and crops yields came in so high,
that countries began imported food on an “as needed” basis. Stockpiles
of grains for a rainy day dwindled.
Well, over the past two years,
because of poor yields in wheat around the globe and increased demand,
supplies of food have decreased materially, and created a panic in
wheat prices. But what did producers do in response? They planted a
record amount of wheat this past year. That is what markets do.

The
high price of oil is bringing changes. People are changing habits,
trying to reduce demand. New technology is heavily researched and
hybrid cars are rolling out. But it will take years for new oil wells
to be drilled, and it will be costly.

From Exxon: Exxon Mobil is
the largest U.S. oil and gas company, but we account for only 2 percent
of global energy production, only 3 percent of global oil production,
only 6 percent of global refining capacity, and only 1 percent of
global petroleum reserves. With respect to petroleum reserves, we rank
14th. Government-owned national oil companies dominate the top spots.
For an American company to succeed in this competitive landscape and go
head to head with huge government-backed national oil companies, it
needs financial strength and scale to execute massive complex energy
projects requiring enormous long-term investments.

To simply maintain our current operations and make needed capital investments, Exxon Mobil spends nearly $1 billion each day.

Iranian oil is a heavy sour crude oil. It is more expensive to refine
into products than light crude oil, like that of Saudi Arabia and WTI.
That’s the reason that WTI oil is usually priced lower than Brent Oil.
Crude oil is not the same where ever its drilled from. It comes in many
different grades and some are much cheaper to refine than others. So
Iran has a surplus of heavy sour that isn’t as valuable right now.

Second,
OPEC only accounts for 40% of the worlds oil supply. You know who the
largest supplier of oil to the US is? The United States of America! If
congress ever let oil companies drill off the Pacific coast and the
eastern shore of the Gulf Coast, we would be swimming in oil and
natural gas. Our second larget supplier of crude? CANADA. Third?
MEXICO. OPEC is only part of the equation.

Thirdly, we don’t
have to run out of oil before prices go up. OPEC typically producers a
surplus of oil of about 2.5 million barrels per day. That surplus
production however, dropped by 80%, from 2000 to 2005. The price of oil
in 1999? $10 a barrel.

Why should OPEC pump oil for $10 a barrel? oil prices bottomed in 1999 and rallied to $35 a full year before 9/11?
Can you explain how prices more than trippled from ‘99 to ‘00?
Easy, there was huge excess supply in the market. Oil producers cut back on production.

Uh
oh, then 9/11, concern about flow from the Middle East. Uh oh,
economies in India and China begin cranking up. Uh oh, huge hurricane
in the US wipes out oil production in the Gulf of Mexico. Uh oh,
violence in Nigeria wipes out 500,000+ barrels per day for over a year.
Uh oh, Iran working on nuclear weapon. Uh oh, China begins creating
stockpiles of raw goods. Uh oh, 30 year old refineries in the US can’t
keep up with demand for products. Prodcution in Alaska is declining.
Production in Mexico is declining. Venezuela nationalizes most of the
oil industry. Production in Venezuela drops.

We will come out of
this bubble in prices, but as the saying goes, “The cure for high
prices is higher prices.” High prices encourage more supply to come
online, encourages alternatives, or reduces demand. The market, however
painful, is doing its job. If prices have overshot ‘fair value” then
prices will correct.

New technology will compliment crude oil, not completely replace it.

Think
of all the plastics that are produced today. The only known substitute
currently is bio-oil and then we’re entering the food/fuel debate. But
certainly if we get the food situation cleaned up and streamlines (no
thanks to Argentina) then we can continue to produce some excess
bio-oil for manufacturing processes.

Crude oil and its
products are portable energy. Why in the world do we use oil to produce
electricity in stationary power plants? Nuclear power is one solution.
As is clean coal technology. So are other renewable sources. Many of
these ideas of been on the board for quite some time (geo-thermal,
solar, hydro, wind, etc) but have been too costly in comparisson to
fossil fuel. That’s all changing. Its not to say that eco-friendly
solutions are necessarily pocket-book friendly solutions, but it does
add some spare capacity to the system (think ethanol).