CNNMoney had a piece on “are we in an oil bubble” which polled a bunch of analysts about oil prices (unscientifcally) – comparing the price of oil to the tech stock and housing price bubbles. What stuck out at me is that optimists amongst the analysts quoted (from the consumer’s point of view those would be the ones who believe we are indeed in a bubble that is due to pop) felt that oil might go back to $100 a barrel – and that $70 or $80 dollar a barrel oil was off the table.
What does this mean? First off, investors should take anything analysts say with a grain of salt – aside from some seen as “outlyers” – its not like they were predicting $100 oil even a year ago. I think its almost impossible to get much more than a hand grenade or horseshoe’s level of accuracy (if that) when predicting prices of something as complex as oil (parsing out demand, supply, the weather, government policy, global events… its impossible).
Odds are that there is some speculative pressure in the market from commodities traders. Supply is drawn very tight, there is a ton of excess capital not being invested in real estate, commodities are going through the roof and so excess capital chasing oil is having a big effect on oil prices at the margin.
That said, it was only October when oil broke the $70 level, so I think we have yet to really see the longer term effects of higher oil prices on purchasing trends (both consumer and business). Yes, people are buying fewer new SUVs – but that’s not a huge surprise. The real surprises, I believe will be in the longer term behavioral changes that are made in the face of doubled commute costs, raw materials costs that destroy profit margins and spiraling transportation costs that make shipping items around the globe in pursuit of cheap labor (or just for stupid reasons) less practical.
In 2001, as part of defending his energy policy which focussed solely on increasing demand, such as opening the Alaskan National Wildlife Reserve (ANWR) to drilling, President Dick Cheney was quoted as saying “Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy.” And even today there is a conventional wisdom in the press that making real changes to the way we consume oil energy, particularly on a global basis, will be difficult to impossible. In the end, however, Mr. Cheney was wrong (almost immediately) – conservation is something that is within reach for the American public when properly motivated. In 2001, the example was electrical usage – where Californians, faced with rolling blackout power shortages and skyrocketing energy bills, cut usage by as much as 10% nearly overnight. More recently, there is evidence that Californians have curtailed gasoline usage by 4.5% during January on year over year basis (and this is when gas was an average of $3.30 a gallon). And the city of Junea, AK, faced with astronomical costs of electrical power due to being cutoff from their source of cheap hydro power by an avalanche that destroyed the power lines that feed the city has cut electrical usage by over 30%.
I think that one area that is constantly overlooked for investment are conservation plays. If the most optimistic analysts are right, and we are looking at $100 oil for the long haul, and given the reality that shifting our energy usage patterns overnight away from oil will be difficult (mostly due to a lack of options) investors should consider looking for investment themes that benefit from a conservation angle.