Sunday, November 11, 2007

Is $100 Oil Cheap?

"Is $100 oil cheap? ... Simply put, the Earth is running out of that magic combination of oil that is both high quality and cheap to extract. ... It is not a lack of oil that will trigger the next oil crisis; it is a lack of production capacity. ... Your average economist will tell you that once you correct for inflation, crude prices reached their actual peak in 1980 during the energy crisis spurred by the Iran-Iraq war. ... Using the government price index (CPI) numbers, that record-high price per barrel is estimated at between US$90-US$102 in today's dollars. ... Using [John Williams] shadow stats, Bud [Conrad] has calculated the oil price history using the 1980 CPI method. It turns out that 1980 barrel of $39.50 crude is the equivalent of over $200 per barrel in today's anemic dollars. ... Another way to view the big picture is to examine the weighing of different sectors within the S&P 500 over time. ... Interestingly, the biggest run has been experienced by the financial sector, which has expanded from 5% to 20% in the last 30 years. ... The current weighing of 9.3% demonstrates that energy stocks have yet to make their big run", Chris Gilpin at, 8 November.

I estimate that $39.50 in 1980 is about $160 today. I agree with Gilpin and have used S&P "sector percentage" analysis myself, noting energy declined from 29% in 1980 to 9.3% today and that financials now make up 20% of the S&P 500. When Harvard and Stanford MBAs beg for jobs with small wildcat oil E&P companies and drillers and field service companies like: Helmerich & Payne, Parker Drilling, Global SantaFe, Pride, Weatherford, National Oilwell Varco, etc., you'll know the bull market in energy is over, see my 25 October post. We've got years and many dollars to go.

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