Stock-Picking Training Program

Try Jim Cramer's Action Alerts PLUS
CLICK HERE NOW

Why We May Never See $80 Oil Again

07/15/08 - 12:05 PM EDT

Sham Gad

I received an email a few nights ago from a coalition of airline companies with the tag line, "You can help keep travel affordable." Curious, I read on. The email began with the obvious conclusions: High oil prices exacerbate economic pain, and the airline industry is being suffocated by the continued rise in fuel cost. Fair enough. As I continued reading, the letter proclaimed in bold type:

Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Unfortunately for us, we are not sure who these "experts" really are. While I am certainly no expert either, I do understand basic economics, and to suggest that mere speculation could be inflating the price of oil by $60 a barrel is absurd.

While it's certainly true that Wall Street always loves too much of a good thing -- Internet stocks, securitizations, etc. -- which almost always leads to speculative bubbles, it's a fantasy to think that without "speculation," oil would be around $80 a barrel. The basic supply and demand laws suggest that we may never see $80 barrel oil again.

The Basic Economic Case

Let's step back and look at some various oil data provided by the Energy Administration Information.

The current worldwide consumption of crude oil is about 86 million barrels a day. Of this amount, the U.S. consumes about 21 million barrels a day with a population of 300 million people.

It appears that high gas prices are making a small dent in U.S. consumption, with the EIA predicting a consumption decline in the U.S. of around 500,000 barrels a day. This past July Fourth holiday weekend saw the least car traffic in a decade, so the basic laws of economics seem to be holding true.

Now onto China, a country with 1.3 billion people wanting to drive, eat, live and travel like Europeans and Americans. China currently consumes about 8 million barrels a day. It's obvious the direction Chinese oil consumption is heading.

To be fair, the Chinese government subsidizes gas prices, which are certainly having an effect on consumption levels. The long-term consequences of China's global might are clear: A nation with four times the population of the U.S. that consumes only half the amount of oil is likely to consume more oil over time. It's easy to draw a similar conclusion for the other emerging nations like India, Brazil and even Russia.

Previous «
1 2 3
At the time of publication, Gad had no positions in the stocks mentioned, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund, a value-centric investment partnership modeled after the original 1950s' Buffett Partnerships. Previously, Gad was a writer for The Motley Fool and a securities analyst for UAS Asset Management, a small, value-focused fund in New York City.

Gad also runs a value investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Gad is working on a value investing book (title forthcoming) to be published by John Wiley and Sons in the summer of 2009. Reach Gad at sham@gadcapital.com.


Investing A-to-Z

Stock-Picking Training Program

Go To Section Home


09/03/08
All You Need to Know About Natural Gas

Need to expand your energy investment horizon? TheStreet.com breaks down how to play the natural gas industry.


08/28/08
All You Need to Know About Oil

As the price of oil fluctuates, go beyond the headlines with TheStreet.com.


07/15/08
Materials ETF Helps You Benefit From Boom

Funds that don't hold General Electric have been doing better than their peers recently.


07/15/08
Pre-Paid Gas Might Splash Back in Your Face

Services that allow you to lock in gas rates may not be such a good deal.


07/14/08
'Mad Money Lightning Round': Muscle Up with Hercules Offshore

The stock will get a boost if offshore drilling becomes a reality, Cramer says.


07/14/08
Emerge Richer With 'Six Sizzling Markets'

Looking for long-term growth engines? A new book explains why you should look at emerging economies.


07/14/08
Crude Oil Little Changed; Energy Stocks Slip

West Texas crude for August delivery was recently down 22 cents at $144.86 a barrel, and Brent was losing 41 cents at $144.08 a barrel.


07/14/08
Options Know-How: Exxon Mobil, Tesoro

How much do you know about options trading? Here's a roundup of insights and ideas from TheStreet.com.


07/11/08
Battle of the Analysts: Gushan Environmental

Piper Jaffray upgrades to buy; Merrill Lynch downgrades to hold. Who's right?


07/09/08
How to Clean Up With Clean Energy

Are you interested in investing in clean energy, but you're not sure where to start? A new book might help you navigate this industry.


07/07/08
Bolling: Brazil Knows Oil

Some observations of a time in a country that understands supply and demand.


06/27/08
Five Hot Solar Plays: The Fundamentals

Looking at valuation, you can see how wide the range is between these names.


06/02/08
More on How to Bet on Wind Energy

Ready to invest in wind energy? But don't know where to start? Here are the latest wind stock picks from TheStreet.com.


08/05/08
Three Internet Stocks That Could Double

These forgotten Internet stocks are being accumulated by hedge funds.


08/15/08
The Five Dumbest Things on Wall Street

Raspberries for Apple; You'll be sorry, UBS; Fortress or Fort Knox? Wholly unappetizing Foods; give Liberty AOL or give them...


08/15/08
McCain Fund-Raising Picks Up

The GOP presidential candidate raised $27 million in July.


08/15/08
Cash-Back Cards Aren't Money in the Bank

Some credit and debit cards give you some cash back on purchases. But you need to manage it well to benefit from it.


Your Recent Quotes: Quote Up0 | Quote Down0
Dow S&P 500 NASDAQ
Oil*
Gold
10 Yr
0.00%
%
%
%
Data delayed 20 min
Sign up for our FREE newsletters now. See All

  • Cramer's Daily Booyah!
  • Before the Bell

Premium Stock Ideas