The Commodity Investor Q&A
With Matt Badiali
June 25, 2008
Q: I heard someone on CNBC call for $500 oil in three years? Do you think prices will go that high? – N.B.
A: Dr. Robert Hirsch is the Senior Energy Advisor at Management Information Services, an economic and energy research firm. He's a peak oil guru.
And frankly, I think he's a nut.
When he was on CNBC, he was "talking his book," calling for huge price increases in oil. But Hirsch made a mistake common among scientists: He fell in love with his theory and forgot his basic principles.
Now, Hirsch probably forgot more about economics than I'll ever know. However, I think when he predicts oil at $500 a barrel, he's ignoring demand and only looking at supply.
If you think supply is inadequate, like Hirsch, then you extrapolate nightmare scenarios of skyrocketing prices. To strengthen his argument, Hirsch adds growing populations around the world and claims that they will also compete for oil.
But think about what $500 oil by 2011 would mean – gasoline at $12 to $15 a gallon... not to mention jet fuel, diesel, and so on. Cars would sit idle in driveways. We couldn't afford to ship packages or buy produce from outside our own zip code.
Hirsch ignores the basic fact that demand must fall off long before oil hits $500.
Let's look at a simple statistic: Drivers consume more than 60% of all the oil used in the U.S. That demand can be cut... radically. Take my parents, for example. They work about four blocks apart... but take separate cars. That's an easy fix if gas prices go nuts.
And the Energy Information Administration (EIA), a division of the Department of Energy, thinks the U.S. population is already making those choices. It predicts U.S. petroleum consumption will fall by 440,000 barrels per day over the next year.
That's only a fall of 2.1% in 2008. But the EIA originally predicted a fall of less than half that. I expect the actual decrease will be larger than even this estimate.
Same thing goes for demand in China. The government just cut its oil subsidy. Guess what? Demand is going down.
Dr. Hirsch needs to rethink his theory.
Q: I've recently read some material on Australian commodity companies. What is your sense of how far along in the game the action is there? – M.H.
A: Over the last two years, Australian mining stocks have returned twice as much as Canadian mining stocks. So we are not early to this game. However, that doesn't mean we're too late...
According to Australia's Bureau of Agricultural and Resource Economics, the country's commodity exports will hit records this year. In fact, the group increased its estimate by 10% in just three months.
And this year's export earnings will see the largest yearly increase in 40 years. Growth in Australia is raging.
The country offers four major commodity sectors: iron ore, gold, natural gas, and coal. And I'm sure there are opportunities for investors.
Set-it-and-forget opportunities here are Australia's biggest mining companies, BHP Billiton and Rio Tinto. But as usual, the truly explosive gains will be found in the small "junior" stocks.
Just beware of jumping in before you do your homework.
Good investing,
Matt
