A few weeks ago, President Obama and his cohorts around the world released 60 million barrels of oil in a shock move to stick it to the speculators — well, those speculators who weren’t politically connected.
As I write this, the price of West Texas crude is $96.61.
Obama’s market manipulation did nothing aside from force the price per barrel down five dollars for about a week… just like Cash for Clunkers, the $8,000 payout to new home buyers, and QE2.
Price fixing by any other name doesn’t work.
In the long run, prices are driven by supply and demand. And these days, supply is dropping and demand is picking up.
In this week’s Barron’s cover story, Gene Epstein writes:
As oil producers’ spare capacity gradually declines to worrisome levels, the average monthly price could reach a record $150 per barrel by next spring, with spikes to $165 or $170. With this, $4.50-a-gallon gasoline will become the norm. That will put a huge dent in consumer wallets, while ramping up the desirability of fuel-efficient cars.
The article goes on to point out that OPEC’s spare capacity is decreasing. Oil prices are near their peak, while oil consumption as a share of GDP is well off its high. If the global economy manages to grow next year as expected, the price of oil will jump.
This is not news to Energy and Capital readers. We’ve been beating this horse since oil fell to $33 a barrel two years ago.
Oil, Where Art Thou?
Where will the new oil come from to supply the ever-growing global population?
About five weeks ago I took off for Kenya to go to the second annual East African Oil Conference in Nairobi.
The Paris of East Africa is dirty, dusty, and crowded, but you can’t beat the sun, the cool mountain air, and the coffee, simply the best in the world…
This was an early-stage exploration conference. It was full of geologists, with fewer members of the C-suite or PR people. They were there to weigh the risks of drilling.
We are at the point where everyone who owns a lease is looking at their neighbor and encouraging them to sink the $115 million to drill for proof. All the while, the cost of exploration blocks is going up.
Liquefied Petroleum Gas
So far, the story in Kenya is one of vast petroleum found by its neighbors coupled with newly discovered off-shore gas fields.
Gas in East Africa is going for twice the price it sells for in the United States, and demand is such that the volume is surging.
Commissioner for Petroleum Energy Martin Heya was quoted as saying he expects “consumption of liquefied petroleum gas to triple by the end of next year.”
The annual consumption will likely climb to 300,000 metric tons from 100,000 tons due to the construction of a “very big import and storage facility” in Mombasa by Africa Gas & Oil Co.
The Kenyan oil infrastructure hasn’t changed very much since the revolution in 1963…
There is a lot of talk about new ports and storage facilities, and at least some of this is coming to pass.
Landlocked Sudan is the third biggest oil-producing nation of Africa, and 75% of its oil is produced in the south. As you may be aware, South Sudan just voted itself independent. This will officially come to pass on July 9, 2011.
The first thing that will happen is foreign direct investment will surge. You would do well to keep an eye on Southern Sudanese oil policy. The plan is to divide up undeveloped oil fields and sell them off.
Small cap wildcatters could make a fortune in this game.
Of course, there are problems…
U.S. Sanctions to End
The United States government has had sanctions on Sudanese oil dating from 1997. But with the new independence and a split from the North, these sanctions will soon be lifted. If they are lifted, it will be a catalyst for share price appreciation.
A second problem is that the current oil pipelines flow through Northern Sudan. Southern Sudan is saying it wants to build pipelines through Kenya in East Africa so it can circumvent Khartoum entirely.
This will again be bullish for Kenyan oil interests, service companies, and infrastructure builders.
Editor, Energy and Capital