Oil Story

Not since the Carter Administration has oil been so much in the news. The chattering classes, then as now, have begun using the word ‘crisis’ in the same sentence as the word ‘oil.’ Lester Brown – now so worried about what an over-abundance of oil consumption might do to the planet, fretted, back then, about the lack of it.

The newspapers and TV newscasters just report the facts: there is a problem with the world’s oil supplies. Too many people. Too many cars. Not enough oil.

The leader of the Free World a quarter century ago declared an emergency. As incredible as it sounds to our sophisticated, jaded and digital ears today – outside Christmas lights were banned…and a national 55 mph speed limit was imposed…all in the name of a ‘crisis’ that did not exist.

“What are you laughing about,” asked Addison as I write these lines. But Addison, born in 1968, is too young and too reasonable to imagine the depths of imbecility to which popular sensations can reach.

There was, of course, some objective reality behind the oil story of 1974. Oil follows the same cyclical patterns of other industries – boom to bust…optimism to pessimism…expansion to contraction… Since oil infrastructure – drilling, shipping, refining – can take years to put in place, occasional bottlenecks can cause severe price distortions.

There are also political issues. A lot of the world’s oil comes from a relatively few places. It is always possible for a few of the producers to get together and jimmie up prices – for a while, at least.

If you were cut off from the media, you would take little more notice of these price swings than of, say, your local town councilor being caught taking a bribe or your painting contractor mixing his metaphors. It would be outrageous – but not unexpected. You would drive less when prices skyrocketed…and perhaps use more gas when they fell. But the sensation mongers in the media and politics managed to get oil in their grip in the 70s. Prices were not allowed to rise sharply enough to clear the market. As I recall, we ended up wasting time sitting in long gas lines… grumbling about the oil companies, the Saudis, or someone.

That was a quarter of a century ago. Now oil is back in the news…and once again, on the verge of becoming a popular sensation.

Again, there is an objective reality behind the movement in oil prices. As I explained a year ago, oil has been out of the popular imagination for a long time. While no one seemed to notice, it became very cheap. Inventories and infrastructure have been allowed to deteriorate. It was an opportunity for a contrarian.

At the turn of the century – 100 years ago – you could buy a barrel of oil for about $1. The Dow was about 60. As recently as 15 years ago, that ratio was still about right. The Dow was about 60 times the price of oil.

But then, the Dow took off…and oil collapsed. Early last year, the ratio of the price of oil to the Dow was close to 1 to 1,000. And now that the price of oil has more than doubled, you can buy the Dow for roughly 275 barrels of oil.

“Oil is still cheap in real terms,” Dan Ferris reports. “$35 oil is equal to $14.10 in 1979 dollars, $8 in 1970 dollars. We are still well below the (real) price peak of $70 reached shortly after the Iranian revolution, near the peak of the Great Inflation, in 1979.”

No surer proof that oil is becoming a popular sensation is the fact that James K. Glassman is writing about it in the New York Times. In yesterday’s article, the man who assured us that the Dow would go to 36,000, explains why:

“The new economy,” he says, “is creating wealth at an unprecedented rate…”

But then, we discover what this means for oil: “…and the newly rich want cars, air conditioning and other comforts that consume lots of energy…and high- technology itself is surprisingly energy-intensive.”

Glassman has discovered the “Internet’s dirty little secret.” And now…after the Internet, the New Economy, and the Big Techs…is it energy’s turn to be a popular sensation?

Glassman cites the work of Peter Huber and Mark Mills who wrote the Digital Power Report: “The digital economy,” they wrote, “is completely dependent on the big central power plant.” They also explain that companies such as Sun Microsystems consume as much power as a small steel mill.

“My guess,” writes Glassman, whose business is minting popular sensations, “is that investors are underestimating the importance of energy.”

Perhaps not for long. “It is difficult,” he warns, “to pick the energy winners,” reminding us of how much money we might have made on the Big Techs if we had bought them before anyone ever suggested doing so. “Picking winners in this sector is nearly impossible for amateurs…” he points out, but then suggests a couple of possibilities.

Among them is Dan Ferris’ favorite – Enron. “The stock has risen 346% in the past 3 years, but many who follow energy companies say it is still undervalued.”

Maybe it is. And maybe, if the popular sensation keeps building, Enron will rise in price even more.

But popular sensations are dangerous – whether political or financial. People surrender their own individual judgment and personal knowledge to a kind of mass, herd- thinking. The key to making money is no longer being able to anticipate the cyclical trends of the oil market, or to buy good companies at low prices – but being able to anticipate the episodic waves of crowd psychology. Those who make money are not analysts with sharp eyes and sharp pencils…but those who can spot a fashion trend.

The energy fad could follow the same sort of pattern of the Internets – working its way from one sector through another as the story develops. The key will be to stay ahead of the stories.

“The real news,” writes Dan Ferris, who has so far been ahead of the fashion scene, “isn’t oil. It’s natural gas. We are headed for a major supply shock this winter. We have 15% less gas in storage than we did last year at this time, and there’s not enough time to make up the difference. Last year’s winter, the mildest winter in 105 years of record keeping, kept natural gas prices-and therefore supply-low.”

“All we need is a normal winter,” he continues, “and my natural gas stocks are going to fly even higher than they already have.”

We will see.

Your correspondent,

Bill Bonner

Paris, France September 12, 2000

*** Oil was expected to retreat yesterday – following an OPEC promising greater production. But it didn’t. Instead, oil advanced $1.50 on Monday… and then another 14 cents in after-hours trading.

*** “Fuel stockpiles are running at more than 20-year lows,” Reuters informs us, “despite refineries operating at maximum capacity.”

*** At $35.28/bl, oil is at its highest level since Iraq invaded Kuwait in 1990. Europe has already been rocked by truckers’ and taxi strikes – in reaction to high gas prices.

*** Britain is now preparing for similar trouble. The British government took on ‘extra powers,’ says the Reuters report, to deal with the expected problems. More below…

*** How is it that in this great new digital era – where information is freely available – that no one seemed to notice we were running out of gas? How is it that the people who check the nation’s gas gauge failed to say ‘fill ‘er up’ at the appropriate moment?

*** Gary North quotes Paul Erdman on the wonders of the New Economy: “In this information age,” writes the former novelist and end-of-the-world herald, “we live in a new world in which decision makers are immeasurably better informed than ever before and where response times are but a fraction of what they were just a generation ago.”

*** Ahem…if that is so…how come the decision makers missed what might be the biggest single threat to global growth of the year… and now are powerless to do anything about it? “We are approaching a crisis of great proportions,” commented OPEC chief, Rodriguez. “Depending on the winter,” the oil price could hit $40 as “production capacity is reaching its limit.”

*** Mr. Bear, no doubt with an amused eye on the oil price, stopped by Wall Street and left his calling card. The Nasdaq fell 82 points. The Dow dropped 25. The Big Techs were, once again, the targets of selling. Cisco fell $2.70. Sun Micro lost $5.50. Juniper Networks got whacked for $14.25. Ciena lost $15.60. Qualcomm was off $3.40.

*** “A report by the bureaucracy that controls California’s ailing electricity grid, says what we’ve been saying all along…” writes Dan Ferris of Real Asset Investor. “And that is… price caps don’t work. The price caps cut wholesale prices by two-thirds as of August 7, from $750 per megawatt to $250. But less than 2 months later, the report affirmed that the laws of nature are still valid… the total cost of electricity consumed was higher during the period of lowest prices. In other words, lower prices led to higher demand.”

*** Meanwhile, the airlines – which are energy consumers – lost ground. And utilities, also gas-guzzlers, rose. But utilities pay dividends. And the smart money has lost confidence in Wall Street’s ability to produce capital gains. Both the Dow and the Nasdaq are down for the year. So, the investment pros are looking for a return on their money in the old familiar places.

*** But the public continues to be as confident as ever. Advancing stocks outpaced declining ones yesterday – 1522 to 1295. 208 issues on the NYSE hit new highs – only 42 hit new lows.

*** The National Ass’n of Business Economics – a group of 3,000 economists and corporate executives has raised its GDP forecast for this year from 4.9% to 5.2% – the highest in 16 years.

*** The group also collectively opined that inflation would moderate next year…and that the productivity surge, the collective delusion and statistical mirage which has so delighted the hearts of American investors, will continue.

*** And the U.S. trade deficit? The gaping hole in the hull of the U.S. economic ship, currently taking on water at the rate of $1 billion per day, is only of “mild concern” to the NABE.

*** Cash, measured by MZM, rose at 8% over the last 2 months. M3, a different cash measure, has been going up at a 10% rate year to year. This is a lot of extra buying power. Prices are bound to rise. But what prices?

*** Debt levels keep rising too. In the popular imagination, Federal debt is falling. Yet, it rose $25 billion last year… about $500 million per week.

*** And the euro fell again. The Esperanto Currency is showing the structural weakness I warned about a year ago. Some currencies are backed by guns…some by gold…but the euro has neither. But neither is Euroland running a $1 billion/day current account deficit, which economist Joan Robinson described as “the road to ruin.” Stay tuned…

*** Leaving nothing to chance, Wall Street is showering Republicans and Democrats with campaign cash. “Just more than half of $45.6 million donated by the securities industry through Aug. 3 went to Republicans,” says a recent Reuters report. “The Street’s most powerful companies,” the article continues, “give almost equally to both sides of the aisle, according to analysis by the nonpartisan Center for Responsive Politics.” Political scientist, John Green, notes that for such large donors, giving money is “an investment.”

*** Another Reuters report: “Each athlete at the Sydney Olympics has been supplied with 51 condoms.” To use all the condoms, Olympic athletes would need to have sex three times a day for 17 days to use up their condom quota. “These people are very optimistic,” says the Thom Bomb.

*** And William Fleckenstein, SiliconInvestor.com, provides more evidence of a tight job market – a complicated sentence from the Austin American-Statesman: “Last month, a job fair was held at the Travis County Community Justice Center, a state jail, that attracted headhunters who pitched jobs paying as much as $25 an hour, plus benefits that included retirement plans, company cars and the promise of career advancement, to many of the inmates scheduled to be released in the next two months…”

*** Today in 1880, H.L. Mencken was born in Baltimore.