Oil Price - the long term bet !!

Oil for me is black gold and sooner or later is going to run out of supply, which would then lead us either to cut consumption (or stop consumption) or look for alternative means of energy for running out cars (Solar/hydro energy? May be?). Here are few reasons why I think so.

Peak oil theory

People have argued it long and are still arguing whether the oil production has peaked in 2005-2006 and we are on the verge of consuming what is left only for few years. There are evidences of large water reservoirs getting disappeared in OPEC region especially Saudi Arabia, leading us to believe that OPEC is pumping water in the field to take out oil. This would in turn mean that OPEC is struggling hard to maintain the production growth.

Oil Budget Deficit or OPEC Quota

10 of the 12 countries in OPEC 12 are producing within there quota’s which were decided years ago (see latest Oil report of May 2010), now these are the countries where Oil is the only official business income for the government to balance the budget and most of these countries are ~70-80% dependent on it. This would make a case of arguing that it’s not really the quota’s which is limiting there production, its there I inherent capacity to produce which cannot be enhanced. Think of this as other way, why didn’t a country like Iran or Nigeria produce more when oil was near $140, which would have solved there problems of deficit for years to come.

Most of the oil rich countries now need a price of around $40-$50 at least to balance there budgets and many of them have a marginal cost of producing an additional barrel at $60-$70.

Is it Speculation or demand driven price rise

Well, some people have long argued that oil price is about 60% speculation, while other says it’s purely a demand supply driven case though there might be little bit impact due to financial transactions. However, CFTC has already argued long back about the case (see this report ) still we seem to have the same notion. I do agree that commodities are an alternative class of assets and prove to be a measure for diversification in this crisis; however that’s true for the entire commodity complex and not just for oil. The only way to take a long exposure of oil or to protect yourself through the adverse price movement (in case you are a consumer) is through futures. Also looking how India and china are growing and there demand numbers peaking, why do we have to blame the entire price rise to financial markets?

Oil Spill

Does it mean something for me? Am I concerned about the environment now? Well honestly, this Deepwater disaster in USA (GOM) caused headlines around the world estimating the loss to the environment, damage to life, etc but yet there are so many other countries where this happens on a regular basis yet no one notices the same. This is largely because all the new discoveries of oil are in unconventional places in countries which are politically unstable, and where oil is the backbone of the economy and big oil giants just bend the rules.

Nonetheless, this disaster might lead to renewed curbs on offshore oil drilling for the near term, which was removed not so long ago by the house due to increasing demand of oil. We can see the visible impact of this spill on the longer term prices of oil.