The Oil Game

As far as I know, I was the first analyst to make the call for $50 oil, a $40 floor, $80 and then $100 oil. It seems obvious now, but it didn’t back when oil was still in the $40s.

It wasn’t long ago that oil sold for $14.35 a barrel. What is it worth today, really? Without all the gaming, the international screwups, the Wall St. amateurs? Probably around $28 a barrel.

I think that price includes China’s new appetite, for the time being, reduced consumption by the U.S., plus increased global inventories. It includes Chavez’ loss of 25% of his own wells, as rigs rust in the fields without anyone to repair them. And it includes the new elephant fields found by Brazil, Russia and others, the end of the Peak Oil Theory, and likelihood that sometime soon the idiots who brought you the Iraq war will figure out how to pump oil again.

That leaves a bit of a gap, around $72 when oil finally does hit $100 (which I think it will do this year), which re-defines the meaning of “risk premium,” if I am right about the price based on value.

Oil pricing has become a game, one in which even the oil majors can be pawns. Just ask Mr. Putin, Mr. Chavez, or Lula, who may be about to start nationalizing his own assets despite his better judgement.

While the people who are playing this game are, in my book, idiots, this wouldn’t be the first time that idiots had wrecked world peace or the global economy. Rather, it takes idiots to do such a thing without remorse or, worse, even clear understanding of the ramifications of their actions.

What if everyone started talking about $30 oil, instead of the media constantly talking it up? Now that would be interesting. Next time someone asks you where you think oil is heading, tell them, “$30, for sure.” At least you’ll be playing a constructive role in this dangerous game.