Model Portfolio timbo56:SSOF1

I believe that over the next 40 years we are going to see a continuing upward climb of petroleum prices. Over the next 10 years I believe that petroleum prices are going to rise by enough to force U.S. consumption of petroleum down from about 20 million barrels a day, now, to about 12.5 million barrels a day in 2018.

I think world production (including natural gas plant liquids) over that time period will fall from about 85 million barrels per day, now, to about 75 million barrels per day in 2018. We are likely to see increased production in Angola, Brazil, Kazakhstan and Iraq, but falling production just about everywhere else, including Saudi Arabia, Kuwait and the United Arab Emirates. Certainly, the United States and China will see lower production 10 years from now, with deep water petroleum having peaked at that point and onshore and shallow water production much lower. Russia, I think, will be about the same or a little lower. North Sea production (UK and Norway) will be way down.

So, if we accept the view that we will have about 10 million barrels per day less to divide among the nations of the world, how will this be divided? I certainly see China as taking a much, much larger share, tying the U.S. at 12.5 million barrels per day. Rapid economic growth and a burgeoning car industry will help China to consume more, even as we are consuming less. If we accept this view, at that point the average Chinese person will consume about 1/4 of the petroleum that an average U.S. person does. Western European consumption will fall, but Eastern European consumption is likely to rise a bit. Middle Eastern consumption is likely to rise a lot. As the price rises the petroleum exporters have more money to spend, and they will spend a portion of the money on more automobiles for their growing populations.

So, again accepting the analysis up to this point, how high does the price have to go to push U.S. consumption down by 7.5 million barrels a day over a ten year period. Well, the good news is that some of the choices consumers are making now will effortlessly follow through to the future. The more fuel efficient mix of cars sold now will effortlessly reduce our future consumption. But we are talking about a huge decrease in consumption, and new big SUVs, while being sold in greatly reduced numbers, are still being sold. Even if the average new car sold today consumed half the fuel of the new car sold 2 years ago, this would still not be enough, because it takes more than 10 years for the entire fleet of cars to be replaced and the number of cars may start growing again. I have to reach the conclusion that petroleum ten years from now will cost about $300/barrel, in current dollars. This would likely result in gasoline prices of about $9/gallon at the local gas station, again in current dollars.

The changes we are going to have to make will be far reaching and will effect every part of society and every aspect of our lives. Product packaging will change, with less plastic being used. Import substitution will reduce the amount of fuel spent bringing goods from abroad. Air travel will see a continuing decline. If we are smart we will start now to build a set of high speed train lines. A much higher percentage of goods will be shipped by train. (I note that currently there is a huge problem with the train line congestion).

So, how can we as investors benefit from this trend? I worry about the oil exploration and development companies because of the possibility of a windfall profits tax. But the oil service companies should not be adversely affected, and may be good deals, now. Railroads are clearly a great deal. Steel producers are huge beneficiaries on several fronts, and they are still relatively cheap (even after their incredible run up in price). Gold miners will be helped by the stoking of inflation by the increasing petroleum price, but hurt because they are major consumers of diesel fuel. And the opportunities to make money shorting stocks are obvious and numerous. I've written before about the fate of the Las Vegas casinos not being particularly bright right now. It's not the business downturn that is going to hurt them, but high air fares and declining disposable income.

Every change brings opportunity, for those who see it coming.