During President Biden’s State of the Union Address, the price of oil jumped 10% to $113 a barrel. The president has prioritized climate change over energy independence at a time when the world is facing an energy crisis.
Coal prices have been skyrocketing and are up about 500% for the year. This week, oil prices climbed even more. If you do the math and adjust for inflation, oil would have to hit $185 a barrel for Brent crude to be at all-time highs.
That’s the way things are trending, and it’s not just because of a new war in Europe or rumors that Biden will stop importing oil from Russia. No, the seeds of high oil prices have been growing for a while.
First of all, we are just recovering from the low spot of a long bear market in oil that lasted from 2014 to 2021. This has killed investment in production and exploration.
Secondly, the global political paradigm has been dead set against hydrocarbons in any form. This means not only are pipelines hard to build and new discoveries hard to permit, but major oil companies have stopped looking for oil and turned to green energy instead.
Every BP dollar that goes to solar research is a dollar that doesn’t replace oil reserves. And we are by no means even close to replacing hydrocarbons in the energy mix.
Third, the COVID-19 pandemic is winding down. People will start flying, driving, and going on cruise ships again. Demand will show a dramatic increase in the next few months.
Fourth, there’s inflation to contend with. You have more money chasing fewer goods.
Capex, We Hardly Knew Ya
Here is a chart showing oil prices versus oil sector capex. Capex is short for capital expenditure. It is the money companies spend to find, develop, and produce oil.
As you can see, spending has been falling for 13 years. Looking for oil and replacing reserves just haven’t been a priority. This is incredibly stupid in terms of national economic health, defense, and well-being, but you can’t fix the dipsticks in Washington.
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That said, this situation does give us a chance to make money.
This chart clearly states that when capex is low, oil prices go up and stay up. No one knows how high oil will go, but I’ll bet we clear $150 a barrel and see $10 gasoline in places like California.
They will make a big deal out of having to add another digit to the corner gas signs.
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Christian DeHaemer Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
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