Wow Denny, you are truly multi-faceted. I didn’t know you were an oil man, too!
The price of oil can be and has been, very volatile, as shown in the chart below from Jim Stack and InvesTech Research. As expected, oil declines during bear markets and recessions are primarily due to shrinking demand. However, as Mr. Stack shows, it is not unusual for oil to decrease in price during bull markets as well, and this is the sixth time this has occurred over the past 32 years.
The chart shows that the price of oil does not stay down for long, but is it possible that ‘this time IS different?’ However, before any rebound, it is likely (from a technical standpoint) that oil is near to a test of the prior bottom of about $40/barrel reached during the 2007-2009 recession. That decline was on the order of 75% as oil fell from $148/barrel. The $40.11 level is a 61.8% Fibonacci-level decline from $105 prior to the drop. Oversold oscillators are now rising from very deep levels, so oil may have found a floor.
If nothing else, it will be very nice for a while if oil stays at these levels, as U.S. gasoline prices will probably fall to under $2/gallon. That would equate to about a $1200 per year bonanza to every family in America.
Will the price of oil stay permanently low, as Denny posits? That would be wonderful, on many levels. Not only the positive benefits to the world economy, but it will ultimately upset the world’s power dynamics. No longer would the Middle East be relevant to global affairs and no longer would the Saudi’s have every one of us by the 'short hairs.’ The U.S. and the rest of the world could let the Middle East religious zealots decimate themselves, as we would no longer have an interest in the region. Russia would no longer be a threat to start WW3 over oil territory in the arctic.
One thing is sure if oil stays low; it will certainly shake up the dynamics of investing. Energy costs have a major impact on corporate profits, with some companies affected far more than others. If this plays out as Denny suggests, there will be big winners and big losers.
If T. Boone is right, then we will know one way or another within 12-18 months. Since the 1980s, I haven’t heard Boone be wrong on too many things regarding oil. On the other hand, his reasoning that “Oil producers in West Texas and North Dakota “can’t drill for $45 oil,” doesn’t hold water if fracking is going to be the dominant technology worldwide. Texas or N.D. don’t hold much sway over the profit motives across the rest of the world. I would love to see more stats on the worldwide rate of adoption of fracking, rather than just stats on potential oil in the worldwide rock formations.
However, like dwpeters, I think my time is better spent identifying and reacting to what is happening right in front of me, rather than speculating on the future. Whether the price stays down or not, there are dislocations occurring right now. As a value investor, I always embrace any opportunity to find mispricing due to over-reaction.