session 133–Find a Dark Cloud in Every Silver Lining

I’ve come to believe this is Randall Forsyth’s job description, as well as his predecessor, the late Alan Abelson. In the case of both gentlemen, I cannot remember an optimistic article or an article with a positive conclusion emanating from their weekly Barron’s column, “Up and Down Wall Street.” They were at least right five times in the last 48 years: 1966 ,1973, 1987, 2000 and 2007 … years where the market peaked and then went down big-time. This is one terrific batting average, .104. Randall does not disappoint with this week’s essay: “Falling Oil Prices: The Downside” (you may not be able to read this with out a Wall Street Journal subscription).

Here is Forsyth’s reaction to falling oil prices for tens of millions of Americans who do not work in the energy sector, but are likely to benefit greatly from lower gas prices:

“In sum, watch out for falling oil prices. Consumers initially may feel pleasure when it costs less to fill their gas tanks. But all those who have benefited from the U.S. oil boom, from producers to suppliers to oil workers earning a healthy paycheck, may be worrying, and eventually may be hurting.”

So if I read this correctly, Randy is more concerned about the welfare of a relatively small population engaged in or supporting oil exploration (a group that has gone through years of unprecedented boom times) than a great majority of Americans that had to struggle to foot the bill. Yikes! Josh Brown, CEO of Ridholtz and Co., summed this up well in this exchange (Running from oil trade) with energy pundit, Dan Dicker. In the meantime, there is a continuing narrative that runs something like this: the oil price decline is all about waning demand; and, waning demand presages a worldwide economic…Recession!!!

It’s not demand, stupid. It’s Supply!

After years of talking about the potential riches of the Bakken and Permian Basin shale plays, the miracles of horizontal drilling and new fracking protocols are upon us … it is a reality. U.S. production this year should top 9 million barrels-per-day, a level not seen in the past 28 years. (Chart of the Day). Three years ago that number stood at only 5.5 million barrels. This is a 61% increase; and, according to The International Energy Agency (EIA), world production would be flat at the 2005 level.

Incremental world crude production

Incremental world crude production

 One Important Caveat Regarding Shale Oil:

Production comes on BIG and fades FAST

typical Bakken shale oil production profile

As you can see in the graph above, a typical Bakken shale well’s production drops over 75% in the first three years after it comes on line. These stats are even worse in South Texas’ Eagle Ford play where you see a 75% decline inside of one year. To keep up production you have to keep drilling. At $75 per barrel costs may become prohibitive, drilling will stop and prices willl rise. As a result, we may be looking at a real opportunity building in the energy sector. But I digress.

There are other elements I should mention in the energy demand story: fuel economy, alternative energy and conservation… all working to mute oil demand. Just think, forty years ago the average miles-per-gallon number for the U.S. light vehicle fleet was 13.1. According to the EPA, the average MPG number for those vehicles built last year will approach 24.

Bottom line: The sharp drop in crude prices is not signaling disinflation/recession and we should all enjoy this respite from high gas prices while we can.  Lower oil prices are a silver lining for most of us!

What do you think? 

The information presented in represents my own opinions and does not contain recommendations for any particular investment or securities.  I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.  

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