Wednesday, July 23, 2008

How We Know Oil is Going Down


After carefully reviewing the current status of supply and demand for crude oil, thoughtful minds might reasonably conclude that the price of crude oil has peaked.

For starters, airlines are going bankrupt left and right, and the level of route reductions the industry is taking in response to the crisis is even larger than what they did following 9/11.

So we know jet fuel demand is headed down.

Meanwhile, the American auto buyer, after years of coddling by an oil-friendly and global-warming-denying administration, not to mention a U.S. Congress full of fools trying to protect the Big Three auto makers from their own bad decision to base their business on making expensive trucks and SUVs instead of low-cost, fuel-efficient cars, has more or less thrown in the towel on trucks and SUVs.

So we know gasoline demand, at least in the U.S., is declining.

Overseas, governments in India, China, Thailand and Indonesia are reducing subsidies for many types of fuel—so demand in developing nations might just be leveling off.

All of which suggests that the old, immutable laws of supply and demand are still in effect, and the price of oil is headed lower.

But the reason we really know the price of oil is heading down has nothing to do with anything like a sober, reasoned analysis.

The reason we know oil is headed down is the comic page.

Specifically, a comic strip called “Wizard” that appeared yesterday in a local newspaper.


Now, we look at the comics page strictly for Dilbert. But when the phrase “140 bucks a barrel” appears in a cartoon, it catches the eye:

Guy: “The Huns are scaling the north wall.”
King: “Prepare the troops for hand-to-hand combat!”
Guy: “Shouldn’t we dump the boiling oil on them?”
King: “Not at 140 bucks a barrel.”


It may not be quite as good as Time Magazine’s peak-of-the-market cover story on “Why We Love Our Homes” back in the summer of 2005, which we highlighted here at the time as a sure sign the peak of the housing bubble was upon us.

But when Congress is moved to blame the spike in oil on “speculators” in order to cover up their own miserable failings, and a comic strip uses the price of crude oil as a punch line, you know we’re at the end of a cycle.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

15 comments:

Joe said...

How do you know global warming is caused by trucks and SUV's? Because Al Gore says so? You global warming cooks are scary.

riffraff said...

Isn't using "Congress" and "miserable failings" in the same sentence redundant?

Jeff Matthews said...

RiffRaff: Our apologies! We need to tighten our grammer.

Joe: Yes, that's right...Al Gore says so, so yes, that's why. Sure.

Also, it's "kooks," not "cooks."

JM

antlord said...

Jeff,

I think he meant cooks, in that you are cooking the books on global warming.

Cheers,
Waiting in Alaska

DaleW said...

It may not be quite as good as Time Magazine’s peak-of-the-market cover story on “Why We Love Our Homes” back in the summer of 2005, which we highlighted here at the time as a sure sign the peak of the housing bubble was upon us.
------

Jeff,
You're getting better mileage out of this call than a Chevy Volt is supposed to get.

Joe said...

Jeff,

Take a shower. Your done. Nothing new here.

Joe

DaveinHackensack said...

As Jim Rogers has noted, since the current secular bull market in oil began in 1999, oil prices have corrected by 40% or more three different times. Even if oil prices continue to fall from here, this is likely another cyclical decline in the secular bull market for oil, one that will probably last at least another five years.

It's true that some countries that have been subsidizing petroleum products have reduced those subsidies somewhat, but fears of political instability will restrain those governments from letting prices rise too high too fast. It's also true that Americans are consuming slightly less on a y-o-y basis. But as the EIA's latest forecast showed, global demand continues to grow, and it is growing faster than global supply.

In time, more efficient uses of petroleum (e.g., plug-in hybrids) and new sources of oil coming on stream will spell the end of this secular bull market in oil. But we are several years away from that happening.

buckeye1 said...

I hear you on a short-term top being in and I agree. But you also called a bottom in housing that surely wasn't a bottom. I just wonder if when everyone signals an all clear on oil if our profligate ways will revert back. Also, if global growth peskily comes back after this global slowdown, then what happens to oil? In other words, is this just a cyclical slowdown for commodities in the middle of a secular commodity boom or is it truly a long-term top? Enquiring minds would like to know.

j clinton said...

I would certainly tend to agree with your rationale on this one. I've posted some interesting charts that substantiate your argument and I thought you might find them interesting. See hyperlink: http://www.hillbent.com/component/option,com_jd-wp/Itemid,1/p,436/

Regards,

J Clinton....

@sethstorm said...

Isn't using "Congress" and "miserable failings" in the same sentence redundant?

Not by a long shot. They would do well to take preventive measures. Not environmental ones, but ones that keep Wall Street in check.

erictaub said...

Airlines going bankrupt doesn't mean people are flying less.

Less new gas guzzler sales could mean people are driving older (read less gas efficient cars)

Subsidies dropping in growing purchasing power economies does not lead to less sales

nice try

Jeff Matthews said...

Eric:

#1 All airlines are cutting routes, significantly. How, then, will people fly more?

#2 US gasoline demand is down anywhere from 2-3% year over year.

#3 Higher prices is in fact reducing demand growth in India, Indonesia and China.

These are facts.

JM

Aaron said...

Jeff: Nice call!

With the price of oil coming down sharply this week, this makes me think of a lyric from a popular song in the classic Monty Python movie "Life of Brian":

Some things in life are bad
They can really make you mad
Other things just make you swear and curse.
When you're chewing on life's gristle
Don't grumble, give a whistle
And this'll help things turn out for the best...

And...always look on the bright side of life...
Always look on the light side of life...

Words and lyrics written by Eric Idle.

Aaron said...

Jeff: Nice call!

With the price of oil coming down sharply this week, this makes me think of a lyric from a popular song in the classic Monty Python movie "Life of Brian":

Some things in life are bad
They can really make you mad
Other things just make you swear and curse.
When you're chewing on life's gristle
Don't grumble, give a whistle
And this'll help things turn out for the best...

And...always look on the bright side of life...
Always look on the light side of life...

Words and lyrics written by Eric Idle.

OilIsMastery said...

Hydrogen is the most common element in the universe and carbon is the fourth most common element in the universe.

Oil is infinite: http://oilismastery.blogspot.com/