Model Portfolio timbo56:SSOF1

Peak Oilers 135, CERA 80

I remember taking a pleasant mountain hike, and when I got to the mountain peak noticing a strange fellow there with a small bottle of olive oil, who was pouring a little out onto the ground. “What are you doing?” I asked him. “In the holy book of the Braphulthustrins it states, ‘you shall anoint the mountain peaks’” he replied, “I am following the teachings of my religion.” That was my first encounter with a Peak Oiler.

But if you think the Peak Oilers are a little strange, the Cambridge Economic Research Associates (CERA) is stranger still. And even more strange is the continuing credence given to this strange group by all sorts of folks, from the U.S. Government, to the news media. To me, CERA long ago completely annihilated any shred of credibility they may have been thought to have had. Their study deriding the peak oil theory, published November 14, 2006, was ridiculous. While roundly abusing Peak Oilers for their illogic, CERA bounded off into fantasy land itself, counting 704 billion barrels of shale oil in its projection of total global resources. This oil is in solid rock. We don’t know of any efficient way to get it out, and there is real doubt that we ever will. Also, CERA completely accepted the figure of 662 billion barrels in the OPEC Middle East, although at the time it was already clear that this figure was (and still is) entirely bogus. What is wrong with them???? In the one-and-a-half years since the report’s publication, its near-in predictions, at least, have been shown to be entirely wrong.

More recently, on November 30, 2007, CERA predicted that the 2008 WTI oil price would trade in the $70 to $90 per barrel range in 2008. At that time, I was predicting a $100 to $120 per barrel range for the year. Well, we were both wrong, but I was less wrong than they were, and I don’t have a big research budget and staff to help me out. Moreover, the report blamed the “high prices” at the time as being the result of market psychology, rather than fundamentals. But even at the prices of today, U.S. stockpiles are lower than a year ago and lower than average for this time of year. This shows that it is fundamentals that have driven the price up.

There was also an article in today’s New York Times by Jad Mouawad and some compatriot, asking why the price is so high. Can there be any question? Isn’t the answer obvious? Demand growth in China had been driving the price up, but now Russian supply growth has stalled out and Russian demand growth has switched into high gear, together with Middle Eastern demand growth. It is a prescription for higher prices and the prescription is working. At the beginning of the year I did not realize that Russian supply growth would stall out and I did not realize the extent to which Russian demand would grow. And I don’t have a big research staff. I’m sure that if I did I would have nailed it, not, because predictions are difficult. But with a big research budget, and an array of minions, one would have thought that at least CERA would have come a little closer. And one would hope that the New York Times, with the array of resources at its disposal, would be able to offer a more cogent analysis.