The Ignorant Investor

Ignorance Can't Stand in the Way of My Opinion

Thursday, August 31, 2006

 

Businessweek: The Case for $50 Oil

Business week ran a story a few weeks back on a scenario in which oil prices would soon fall. Since my continued well-being is dependent on home heating oi and gasoline, among other commodities, I wanted to note down the main thrust of the article by writer Mark Morrison.

Inventories were up in July, Morrison writes, "and demand in the U.S. is getting dialed back at a time when plenty of oil and refined products are sloshing around." What's more, speculation on prices may be running out of steam now that much of what can go wrong for the oil business- wars in the mideast, pipeline damage in Alaska, hurricanes- has happened without pushing prices past the $80 mark.

Worth noting: If $50 oil comes around, oil company stocks will get hit hard because oil stocks are about 80% correlated with the underlying oil price. That's something to think about for people like me, who is holding a bag full of BP stock. May be time to mostly end our long relationship.

On the counterpoint, we've still got an awful lot of Chinese consumers who will be wanting cars. The big question is, will their energy use support oil at $80 a barrel, or only $50. Or $30. That's something to think about when someone pushing an oil stock blithely invokes the "new Chinese consumer" as justifying ever higher prices for energy.

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