Oil sands and the Credit Bust

Oil is at $61 this weekend. I told everyone that each year after labour day...oil prices plummet fast. Check the charts. The summer driving season is over and there was enough oil to support the gasoline demand. Year after year after year. The only time I have seen a gasoline line is after a hurricane.

However, this time the depression of oil prices comes with a credit crunch. This is not good. Energy is a capital intensive business. The average cost of drilling an oil well in the US in 2004 was $1.44 million according to the US Energy Information Administration. Costs of drilling oil wells has increased significantly since then. The chances of drilling a dry well is 80%. Therefore, multiply 1.44 million x 5 x the inflation percentage in the rise of oil field projects since 2004. Offshore drilling is considerably more expensive.

The inability of banks to loan out money to bring more oil to the market is going to hurt Alberta's efforts to more the oil sands from unconventional to conventional. A new $150 billion stimulus package is being prepared by the House of Representatives. The $700 billion wasn't enough.

This might be for real. But I will wait to February when refineries started buying oil for making gasoline.

I think this may be for real because the speculators have been taken out of the market. Banks aren't willing to fund hedge funds that want to go long on oil futures. We are probably seeing the true price of oil right now. If so...wow that was a lot of speculation.

My economics professor insisted that there could never be a "bubble" for a commodity. He showed us alot of supply and demand curves and calculations that I found hard to digest at 8:30 pm on a Thursday night. He was pretty passionate and certain...maybe we were about to enter another new economy where the laws of supply and demand seized to exist.

As a side note, it is also going to be really interesting to see how Russia, Iran and Venezuela react to a severe reduction in oil revenues if oil prices continue to decrease. They might just find a way to scare the world into pushing it back up. I love the term "Axis of Diesel". These are the three that we need to watch for in the next decade if oil prices do not start to climb back to the $100 level. They have funded alot of social programs using their oil wealth. Most experts are suspicious that they didn't do the Norwegian/UAE thing and save it for a rainy decade.

An bullish point in the case for higher oil prices is that the economy of India and China have not collapsed. The demand for their products and services is still strong. Therefore, demand is going to continue to be strong and hard.

February 28th is my date as to whether the commodity bull market is dead. My bet is that it isn't. However, unless the banks start loaning money again....building energy delivery infrastructures is going to be difficult.