Global resources essential
Toolbox
Published: September 7, 2008
While on a long bike ride with the sun blazing in a cloudless sky and nothing but the repetitive drone of my pedaling and my own breathing on my mind, I found myself thinking about the world we live in and how we choose to react and interact with the realities that are inescapable in our daily life.
We live in a complex world of many competing interests and yet, our world gets more intimate every day. How can that be? Complexity has no bearing on intimacy. We are now longer just a country able to make decisions and live within our borders. Every decision we make has huge implications on many other opportunities. We make a decision and some doors open while others close.
The price of a gallon of gas at your local pump is one of the best examples of competing interests in a world getting smaller every day. Why has the price of oil risen from $10 a barrel just nine years ago to the staggering price of $140? Sure we have inflation in this country and in the world but let's get real. This isn't inflation. What is the future for oil and what are its implications for everything else we depend on?
One of the world's best known economic forecasting and market analysis firms is headed by Dr. Horace "Woody" Brock. He recently spoke at a conference in Sydney, Australia (no, I was not there but wish I had been) and offered the best assessment of the oil market I have heard.
He gave three reasons for why the oil market is where it is. The first reason is increasing demand from all over the globe. Even though demand in this country has tapered off, other countries have made up for our weaker appetite for oil. The second reason is about peak oil. I wrote about this some time ago when we were just starting to see peak oil. A few years ago, several of the world's largest oil fields peaked in terms of production, not because of demand but because of supply. Brock cited the oil production in Mexico that is down 30 percent over the past four years as well as declines in other areas of the world such as the North Sea and Russia. The last reason is the most intriguing and controversial.
Brock calls his last reason, "thugocracy" which he believes will discourage any exploration or development of new venues for oil. He feels that because many of the areas for development of new production are in countries that are anti-free market. When oil production is nationalized or the country is politically unstable the future of exploration is greatly limited. You are not going to get any oil company to come in and spend the money to develop reserves under these circumstances. He specifically refers to Venezuela, Bolivia and China as countries whose politics are not conducive for oil exploration by private developers. He sees these countries, and others, as incapable of supporting their current level of production and certainly not able to support further exploration.
Oil is not a commodity that has cousins capable of stepping in when supply is low. You can eat chicken when there is no turkey at the supermarket. Such is not the case with oil.
As to the future for oil, we have a steep level of demand and supply is also steep because development of new sources of oil can take many years and we are limited in where we can find it. Experts know where some of it lies but are unable to use that knowledge to do what it takes to develop it. While conservation does help, it does not help significantly in the short term.
Brock gives a dire prediction that we will eventually have to ration oil and he thinks this could happen within five years! Normally I would not be impressed by this prediction and would write it off to the ramblings of a crystal ball gazer just trying to grab a headline. Brock was very right five years ago when he said the price of oil would take off. And he's continued to be right.
These are the ideas of one person and while others may agree, there are always others that disagree.
For your purposes, it is important to be mindful of the possible extreme shrinkage of oil production. Rising prices will increase the cost of just about everything we do and will not be helpful to the stock market over the shorter term. Even stable prices at this level are not helpful.
Being cautious and understanding of the complexities we face is crucial as you near or continue in your retirement years. Success will come from acting by planning and using forethought so you are caught reacting when you least expect it.
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