Wednesday, April 13, 2011

Prediction: Oil Hits $200 and These 4 Things Happen

The price of oil is around $110 a barrel. This with nearly 9% unemployment, anemic consumer spending and less-than-robust growth in the United States and European Union. Even China and India's economic juggernauts are beginning to decelerate.
It's time to think about the inevitable future.
And I think things are going to get better.
We're in the early stages -- leaders are starting to put forth serious, detailed plans to significantly reduce federal outlays, including a complete overhaul of Medicare and Social Security. I think we'll see a balanced budget before the end of the decade, as well as an honest-to-goodness budget surplus.
I predict that Washington's spending, currently around 25% of GDP, will fall dramatically in the coming years as these events unfold. When that occurs -- notice I'm not hedging my bets here with conditional language like "if" -- two things will result:
1. Businesses will be created as the nation's entrepreneurs begin to feel more optimistic about the long-term future and more comfortable taking risks. We'll see this in business start-ups first, then in larger companies as they start to hire, initially a little and then a lot. Unemployment will revert to or beneath historical norms.
2. Interest rates will rise a little to keep inflation at bay, while growth will reach highs unseen in recent memory. They will not be sustainable long term, but the world will be reminded of the power of the mighty U.S. economy. Domestic growth will not only trigger a major recovery here at home -- let me be the first to call it The Great Revival -- but it will also have wide-ranging effects globally as the world's export economies get busy filling U.S. orders.
And I'm willing to offer one more prediction.
3. We'll see $200 oil before this is over and that price likely will become the new economic reality after the Great Revival takes root.
I don't know what that's going to mean for the S&P 500 or the Dow Jones Industrial Average, or the Nasdaq Composite Index,, but I can tell you in no uncertain terms that it will be unequivocally stupendous news for the nation's oil producers and oilfield-service companies. Heck, refiners -- the industry's traditional low-profit whipping boys -- might even share in the wealth.
But make no mistake: The coming surge in oil prices -- which is inevitable as the economic recovery puts more dollars in U.S. workers' pockets and simultaneously fuels demand for growth and thus oil worldwide -- is a cataclysmic shift. It's not temporary. It's a true game-changer.
(My colleague Nathan Slaughter of Scarcity & Real Wealth fame even put together a free web presentation that touches on the global demand for every resource -- including oil. Click here to watch.)
And the one overriding fact is that the big elephant finds are harder to come by and the next approach takes a bit more creativity. Cheap oil is done.
That means what actually makes "economic sense" when it comes to oil exploration and production can and does change. And "economic sense" certainly won't change marginally with a game-changer like $200 crude -- it will be totally redefined.
This means four key things:
1. Rig activity
First, it certainly is going to mean an increase in drilling. The Wall Street Journal reported on April 1 that "the oil rig count hit its highest level in more than 20 years for a fourth week," according to data by oilfield service firm Baker Hughes.
2. Offshore interest
What's happening on the ground will be mirrored offshore. On March 30, the Associated Press reported that "more than two-thirds of offshore leases in the Gulf of Mexico are sitting idle." Those inactive areas are thought to hold more than 11 billion barrels of oil, according to government estimates.
3. More supply from the oil sands
Third, the inevitable rise in the price of crude is also going to mean a huge increase in production from our friends in the oil sands in Canada. A March 30 special report in The New York Times noted that "more than 20% of U.S. oil imports come from Canada, and half of that from oil sands."
4. The worldwide ripple effect
Finally, higher crude prices mean that worldwide exploration and production efforts will be stepped up too, which is great news for emerging countries such as Uganda and other impoverished areas of Africa that are sitting on billion-barrel finds.
Action to Take -->  So: Increased U.S. drilling, a spike in offshore exploration, more supply from the oil sands, and a serious uptick in worldwide production. None of that is intellectually daring. Those four areas are nothing new. And to some degree, they happen with every price spike.

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