The Rise in Oil Prices Is Just Temporary

oil - The Rise in Oil Prices Is Just Temporary

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The last time oil prices shot up toward $100 per barrel, in the early part of this decade, technologies like wind and solar were just getting ramped up and energy efficient transportation was a gleam in Elon Musk’s eye.

Well, oil’s back, baby. OPEC is predicting consumption of 98.85 million barrels per day this year, up 1.65 million barrels per day from a year ago, with increased U.S. production of 10.7 million barrels per day easily soaked up by the market, and political uncertainty continuing to drive prices higher.

How high? How about $100 per barrel? 

But beware. Short-term gains in oil prices are encouraging long-term trends that even Saudi Arabia knows are bearish for fossil fuels.

Laissez les bons temps rouler, as they say in New Orleans during Mardi Gras. Let the good times roll. Just remember that Ash Wednesday is coming.

The Whiting Example

At the current price of $70 per barrel even speculative issues like Whiting Petroleum Corp. (NYSE:WLL), which dominates production in the high-cost Bakken play of North Dakota, are being bid up. Whiting shares have doubled over the last three months.

Whiting hasn’t been profitable since the last boom, losing almost $5 billion since the start of 2015. But operating losses came in at just $16 billion during the first quarter, on revenue of $515 million, which could mean a 33% top-line gain over 2017. Analysts are expecting profits of 47 cents per share, over $45 million, for the quarter ending in June. 

Whiting has maintained positive operating cash flow, but its financial costs have more than eaten that. The company has over $2.8 billion in long-term debt, which trades at a discount of over 50%. Despite this, that’s where the big profits have come. The debt was trading at just 6% of its value as recently as last September.

Still, the Bakken play has had three years to get its infrastructure in order, and increasing production means it’s now the Permian that’s pipeline-constrained. Thus, it’s in the most speculative, out-of-the-money oil issues where the big profits are lying, despite balance sheets that look like train wrecks.

It’s Different This Time

A big change has occurred in the energy market.

The oil veto on growth, something I wrote about back in 2011, no longer applies. It’s not just that solar and wind costs continue to fall. They are now below even natural gas prices.

It’s also growth in the cheapest form of renewable energy, efficiency. Having fuel economy set by the market doesn’t mean fuel economy goes down. Hybrids like the Toyota Prius and electrics like the Nissan Leaf are appearing all over American roads and the industrial obsession with efficiency, everything from LED bulbs that turn off automatically to more efficient factories, is becoming a real differentiator.

The thumb on the scale of energy prices is having an effect.

The Bottom Line on the Price of Oil

I have thought for many years that the economy of this decade has a lot in common with that of the 1970s, only in reverse.

Where the 1970s were marked by rising oil prices, each small effort at efficiency overwhelmed by political turmoil, today it’s the opposite, with efficiency rising quickly thanks to new technology and political turmoil able only to hold the line, for a time.

Saudi Arabia alone plans to put $7 billion into renewable energy this year, China represents more than half the solar market, and African countries without petroleum infrastructure are continuing to grow.

The thumb of efficiency grows, the push of turmoil decreases and, by late 2019, I expect the energy market to crack wide open.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

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