Energy. Despite the financial crisis, I expect to see at least $200 oil and $6 a gallon gas sometime in the not-too-distant future.
In my opinion, anyone who thinks the oil and gas bull markets are over and that cheap energy prices are here to stay — should wake up and smell the coffee!
Even Dr. Fatih Birol, chief economist at the respected but conservative International Energy Agency (IEA) admitted during a recent interview in Paris that the world still faces the prospect of catastrophic shortfalls in oil supplies.
Amongst the problems he cited ...
Tapped out oil fields all over the world that are now well past peak production.
So much so that oil production is likely to peak in about 10 years — at least a decade earlier than most have previously estimated.
In a survey of 800 oil fields worldwide, fully three-quarters of global reserves have already reached peak production.
Moreover ...
The rate of decline in oil production at these fields is now running at nearly twice the pace as calculated just two years ago.
The IEA estimates that the decline in oil production in existing fields is now running at 6.7 percent a year compared to the 3.7 percent decline it had estimated in 2007.
Chronic under-investment by oil-producing countries, made worse by the global financial crisis, dims any hopes for new future supplies.
In addition ... demand has not fallen much ... there's still a lack of refineries ... supply disruptions from weather and terrorism are a constant threat ... and more.
Bottom line: The IEA concludes that the global energy system is nearing a crossroads and that consumption of oil — with expected demand far outstripping supply — is "patently unsustainable."
Furthermore, according to Dr. Birol, even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production. To keep up with the expected increase in demand between now and 2030, the world would need to find six Saudi Arabias!
Short of that, and the world could reach a major "oil crunch" within the next five years.
I agree. But there are two forces neither the IEA nor Dr. Birol have addressed. Both of which I believe could accelerate the crisis.
Additional Force #1: The weakening U.S. dollar. Oil is priced in dollars. So as the dollar falls in value, the price of oil naturally experiences an upward revaluation in dollar terms.
We've already seen the effects of this in the oil market, with all the talk about how oil has become a hedge against a falling dollar, and with speculators now trading oil in true "black gold" fashion — running into oil just like they do with gold, whenever the dollar starts to slide.
But make no mistake about it: The "dollar hedging" aspect of the oil market is not going to change anytime soon — even as the Commodity Futures Trading Commission, or CFTC, tries to clamp down on oil speculation, actually threatening to make the oil markets less liquid, and more prone to rising prices rather than falling prices.
But that's a whole separate issue. The facts remain ...
A. The dollar is in a long-term downtrend, as I've mentioned many times before, and as can be seen by its recent action, which has put the buck within roughly 5 percent of its all-time record low.
B. Oil will continue to be traded mainly in dollars until a new world reserve currency is established.
Yes, there have been attempts to price oil in other currencies recently, namely the euro. But that wouldn't do much to eliminate the "dollar-hedge-aspect" of oil to any extent.
So don't expect the relationship between the dollar and oil to change anytime soon. It will only change once a new world reserve currency is introduced. Until then, the long-term upward pressure in oil is likely to get a further boost from the weakening dollar.
Additional Force #2: China is cornering much of the world's oil supplies. China's muscle-bound economy eats like a hog — an energy hog. Even though demand has slowed a tad, the insatiable giant consumes more energy than its citizens can produce in their backyard.
So China has gone to the market to shop very aggressively for oil supplies, adding to their reserves. It has invested aggressively in the Middle East, Africa, Iran, Venezuela, Brazil, Russia, Mexico and more.
Keep in mind, money is no object for China. Beijing now has $2.13 TRILLION in reserves. But China still lives hand-to-mouth energy-wise, barely keeping ahead of its appetite. In fact ...
More than 40 percent of China's oil needs must be met through imports.
China's strategic oil reserves, just implemented late last year, remain woefully short of supplies, having just enough oil to meet 30 days of demand in the event of an emergency.
Meanwhile, Beijing doesn't want to appear too anxious to buy oil for fear of touching off a speculative frenzy and lighting an even bigger fire under oil prices. Thus, Beijing is playing it down in the press.
I know how the Chinese government works. I've been to Beijing several times. I've met with business people and government officials.
Indeed, one of my meetings a few years ago was with a top-level government official. When I brought up the subject of oil, his response: "We need — and we will get — every drop we can get our hands on, no matter what it takes."
All this is why I believe that virtually all pullbacks in the price of oil are likely to be met with massive buying from the Chinese, effectively putting a new floor under the price of oil at around the $50 level, worst case.
On the upside, given all the forces I just discussed above — I believe we will eventually see $200 oil and $6 a gallon gas, or even higher.
My view: If you have long-term capital to commit to the energy sector, I suggest considering a diversified mix of shares in long-term energy positions that include ...
A. Great energy companies such as British Petroleum (BP) ... ExxonMobil (XOM) ... China Petroleum & Chemical Corp. (SNP) ... CNOOC (CEO), to name a few.
B. Energy-based ETFs like the Energy Select Sector SPDR ETF (XLE) and the iShares S&P Global Energy Sector Index Fund (IXC).
C. Energy royalty investment trusts such as Permian Basin Royalty Trust (PBT) and Enerplus Resources Fund (ERF).
D. Instruments tied purely to the price of oil such as the PowerShares DB Oil Fund (DBO).
For specific short- and intermediate-term recommendations, be sure to become a member of my Real Wealth Report, for just $99 a year.
