The Future of Oil

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Kevin O’Leary should hold off on investing in the Alberta oil industry, not because Premier Notley isn’t going anywhere but because it just makes sense. Based on the precept of investing that you should buy low and sell high, he should wait until the properties become real bargains.

The price of oil has just dropped below $30 a barrel, a level unpredicted even six months ago. It may have a way to fall yet.

A number of factors are coming together to make a perfect storm for falling energy prices.

At the top of some people’s list are the faltering economies in China and some of the other BRIC countries. Falling demand for oil is certainly a factor in the price fall. While the American economy is picking up, its thirst for oil is not enough to prop up the price by itself.

But falling demand is only part of the picture. New technologies – notably fracking – have released a great deal of previously unrecoverable oil and, more importantly, natural gas, into the North American market. Energy reserves have seldom been higher. Meanwhile, solar and wind have become serious competitors as a source for electricity and are bound to become more so if the US keeps even half of its commitments to reduce greenhouse gases. While a Republican in the White House might change that – it will have little effect on other countries that aren’t in denial about the causes of global climate change.

Of course, the real culprit in the falling price of oil is Saudi Arabia which is determined to become, once again, the world’s dominant supplier of petroleum. They are willing to drastically cut their own revenues if only to irreparably damage the oil production capacity of other countries.

Things get a lot more complex now that the new deal with Iran will release billions of barrels of relatively cheap Iranian oil onto the already glutted market. Prices as low as $20, $15 or even $10 a barrel are possible. Think it can’t happen? During the late-90s, oil hovered in those ranges for over a year before the growing world economy and conflicts in oil producing regions drove the price up again.

Of course, what goes down is bound to go back up, right? But will the world economy ever rebound sufficiently to drive up demand for oil – especially in a world that finally seems determined to lower its carbon footprint?

Low oil prices are a terrible thing for some oil producing countries – Nigeria and Venezuela may see their economies and governments collapse in the wake of lost petro-dollars – and bad for some others, like Canada and England, who rely on oil to boost sometimes faltering manufacturing industries. Only Norway – which frugally set aside most of their past oil income – is likely to escape real problems.

For other countries – particularly those who have invested in their industrial infrastructure, low oil should be a good thing in the short term – and irrelevant in the long. Unfortunately, Canada has largely failed on that front and will pay the price for over-emphasizing oil and allowing corporations to hoard now devalued cash. It may be a tough row to hoe for any investor hoping to sell high somewhere down the road.

And that’s ten minutes.

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