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The Obvious is Obviously Wrong Trillions of Barrels of Oil,,, and Prices Soar?

June 29, 2005

The constant Bleating of "the coming oil shortage" has been around for `more than 30 years, so when will it be here? Most either remember and/or have read about the, around the block lines at the gas pumps in 1973-74 ad absurdum. I was a stock broker/analyst in Montreal back then and I can remember quite succinctly as Dome Pete hit $120/share, partly because they hand found large gas reserves north of the Artic Circle on Baffin Island. But in order to get the gas out, they were planning on building Ice-breaker Tankers, that could only navigate up there less than three months a year. In order to break even, oil would have to go up to $100 +/bl. I must have made at least 1000 phone call's trying to get my clients and prospects to either take their profit and go short but alas I didn't get even one single order to sell let alone go short. So I sold 200 shares short in my own account to demonstrate how serious I was but all it got me was the title of Super Bear as well as getting me fired from M.L. for selling and shorting all their 1, 1's.while their bulls were running across the TV screens. But that's a story for another time.

All the high priced Guru's from that time until today have been making dire predictions as to how high oil prices will go in both the short and long term. If they had been right, the world's oil supply would have been long gone by now. Still, the notion persists as strongly as ever that the world is running out of oil. A professor at Princeton (that great bastion of liberal thought) published a book in 2002 with "Impending World Oil Shortage" in the title, which was favorably reviewed in all the right places. Plus the price fluctuations over the past year has only served to feed that misconception. Now, opinions are like noses, every body has one, so instead of me giving you mine I'll just stick with the facts, and basic economic principles, to wit: There is no shortage of oil. There are no lines anywhere in the world, except perhaps for a few days here in Florida just after last years 3 Hurricanes.

There will be no shortage of oil. Not now, not next year, not in 50 or 100 years. In fact in a free market there is no such thing as shortage, unless of course the government interferes, because Price will always make sure supply and demand are equal. Why? Because of one of two things , or a combination of both will always happen. Either higher prices will induce greater supplies ( more drilling, higher cost supplies will come to the market etc.) or Higher prices will reduce demand ( alternate sources of energy and less driving etc.) or some combination of the two. that's basic Supply and Demand economics. But of equal importance is that there is plenty of oil already available, discovered but not yet exploited and yet to be discovered.

"Oil, Oil, Everywhere..." is the title of a fact-filled essay in a recent Wall Street Journal, which shows how absurd the "oil shortage" fears truly are: "To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that's trillion -- over a century's worth of global supply, at the current 30-billion-barrel-a-year rate of consumption."

In a speech this past October, Alan Greenspan noted that, "During the past decade... gross additions to [world] reserves have significantly exceeded the extraction of oil the reserves replaced." So: Shortages have nothing to do with oil prices because there is no shortage. In truth, when it comes to the price of a barrel of oil in today's market, there is virtually no evidence that supply & demand has anything to do with it. Total world supply and demand have grown at the same constant pace since the mid-1980s. And by definition, two constant factors cannot account for wide fluctuations in the outcome (namely price) of an exchange. The explanation must lie elsewhere. Prices in a freely traded market are always a function of what the interaction of sellers and buyers bids. However Innumerable factors will affect the psychology of both the buyers and sellers -- yet when their minds meet, you get a price. And make no mistake about it that meeting of those minds is, in most cases, mostly psychological.

I personally witnessed the manic psychology at a recent investment conference, where "The consensus that oil prices can only go upward for the rest of human existence is a broad and deep conviction. When oil was selling for $12 a barrel a few years ago, no one was interested. There were no booths at conferences touting higher oil. Nor were there all day commercials on TV and Radio, touting options on oil and gas" But " when oil first hit $40/bl the experts couldn't wait to pay $120 a share for a company whose only asset was a dream based on $100 +/bl Oil.


As usual " the obvious is obviously wrong". When ever the consensus of opinion reaches an extreme in either direction, then its time to bet against the main stream. Personally I've taken all my profits and sold the last of my oil holdings into this last spike in oil prices . I'm now looking for the opportunity to begin shorting Oil Does everyone not realize that Iraqi reserves are probably larger than Saudi Arabia's are? And that once we have a stable Iraq, which is just a matter "when not if", the psychological factors will once again change and we will have a better chance of seeing $25/bl oil than $75.

"Fore warned is to be fore armed" but as is usual no one will listen. They didn't listen then and they won't listen now


Aubie Baltin CFA, CTA, CFP, PhD.
Palm Beach Gardens, FL
[email protected]


29 June 2005

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