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The Oil Forecast
February 25, 2011
My logic: the recession reduces demand but only temporarily. Recovery from recessions is uneven globally. Some regions recover months, perhaps even years before others. A robust economy in Asia and to a lesser extent in Latin America will create demand that will drive prices up despite a slight fall in use in the U.S. and the EU.
Speculation or unexpected geopolitical events – “triggers” – will create volatility. Speculators will enter the market on supply shortages. No regulating body can keep them away from the opportunity to make money.
My forecast from mid-2008 forward: 75 to 85% confidence that an oil price spike and permanent plateau above $100/barrel will come sometime in the 2011-2014 time frame.
It’s been of interest to clients in, well, almost every field. Because as one CEO said to me on being asked what energy prices affect, “Everything!”
As the economic recovery has forged ahead strongly almost everywhere except the North Atlantic the price of a barrel of oil has risen back through the $50, $70, then $90 levels. Now the unprecedented events in the Middle East have taken Brent futures over $111. West Texas will follow.
Will it stay there? Of course it depends on a complex array of factors. Economic effects, how high the price spikes, volatility, whether the Saudi’s can really make up most of the shortfalls, refining bottlenecks, and more. In the weeks ahead I’ll place more information here on the implications of this important trend.
In the meantime I’m getting a lot of queries from clients who quickly remember my forecasts and are running through their Plan B strategies to react to the development or are confident because they planned for the high probability of this years ago.
Eyjafjöll
April 16, 2010
This is a classic situation of ripple effects that I discuss in presentations and help clients prepare for in consulting engagements and strategy sessions. Let’s take a look at just a few of the potential consequences:
- No air travel in and out of one of the world’s most crucial centers of commerce. Potentially for not just days but possibly weeks or months.
- Right now the volcano is erupting through hundreds of feet of glacier ice. As that ice melts the eruption might be less explosive but it could also launch finer ash even higher into the stratosphere. The effects of the ash on air travel might extend worldwide.
- The effects on air travel are in the UK, Scandinavia, and major airports in Central Europe. There are closures and delays in Rome, Moscow, and Eastern Europe. The airports affected handle hundreds of millions of passengers and millions of tons of cargo yearly.
- If the delays continue for weeks it will take weeks to clear the backlogs and return to any normal operation. Some of the slack will come from positioning larger aircraft to the routes but this will affect other air travel.
- Some passengers will crowd onto rail and ferry transportation to get to Spain, Turkey, perhaps even Moscow to get to airports still open and operating.
- Many passengers are stranded on other continents, notably the US, and face tough choices for getting back to their homes. Ocean crossings by boat may come back into favor if this continues for weeks.
- Airlines, especially those in the EU market, have been financially stressed by the economy and fuel costs. Expect this event to take down up to a dozen carriers. Even the low cost carriers in the EU will see significant effects. Losses per airline run between 3 and 20 million dollars per day.
- There will be pressure to fly through the ash. Some governments and airlines will begin to weigh the risks and consequences.
- The behavior of the volcano is unpredictable. New fissures might open. It may subside unexpectedly.
- We’ll see another spike in usage of telecommunication alternatives to travel. Probably with long term future effect. Telepresence will get specific attention and fiber optic advantages will come even more to the fore.
- Disruptions to supply chains, lowering of petroleum demands, economic effects, scarcity of air-freighted luxury products, changes in air travel routes, long term climate changes, and many other after-effects will arise.
The Buffett Letter
March 01, 2010
I read Warren Buffett’s letter to me as a shareholder this morning. Direct, analytical, balanced as usual. I like this passage a lot:
“Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding. Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy.”
The chairman’s contention that obvious upside growth is no guarantee of success is one that many leaders miss. I see it in industries challenged by bright but unclear futures.
Agriculture is an example. It’s obvious that increasing world population is going to demand food and a growing middle class will increase demand for animal protein in diets.
OK. Barring a major disease outbreak or a comet hit, this is an obvious outcome.
Many in agriculture assume that North America will be the big winner. That the world will beat a path to their production. That other nations, other producers will not be able to keep pace or match their products. Here the Buffett interpretation is missed.
Predictions from Malthus to Paul Ehrlich to recent forecasts of peak oil after-effects have breathlessly proclaimed danger. I watched Lester Brown of the Worldwatch Institute in 1995 do a predictive presentation on Who Will Feed China. He’d written a book with that title.
The answer to Brown’s question? China itself. While importing substantial quantities of soybeans and vegetable oil it is quite adept at meeting its own food needs and exporting very large quantities of foodstuffs and value-added products to the world.
Where is Buffet’s “host of competitors” battling for supremacy? Everywhere.
I can cite examples of basic crop rotation and sound agronomy’s ability to triple and quadruple the productivity of land in Asia and Africa.
Then there’s wonderful technology not involving genetic modification but making use of plant genomes to bolster Mendel’s techniques in developing even better crops and nutritious food. Mega-competitors like Brazil, Argentina, and huge multi-national corporations that have bought land in the poorest nations will crank out food, feed, and fiber in the next 3 decades.
Errors in judgment like looking at autos in 1910 or TV sets in 1950 or hand-held converged devices today with rose-colored myopia abound. There’s no argument that strong demand is ahead but there are no clear, dominant, easy winners.
Heck, one of my clients, Motorola, is spinning off its well-known handset business and retrenching to the predictable, profitable platform that has been there for decades: two-way radios and similar technology. Personally I think it’s a solid, overdue strategic move.
Question the too-easy and too-optimistic assumptions. Widen your view. Look ahead. Identify the potential competition before it surprises you. And then adjust your strategy to compete in the good, but challenging times ahead.
The chairman’s contention that obvious upside growth is no guarantee of success is one that many leaders miss. I see it in industries challenged by bright but unclear futures.
Agriculture is an example. It’s obvious that increasing world population is going to demand food and a growing middle class will increase demand for animal protein in diets.
OK. Barring a major disease outbreak or a comet hit, this is an obvious outcome.
Many in agriculture assume that North America will be the big winner. That the world will beat a path to their production. That other nations, other producers will not be able to keep pace or match their products. Here the Buffett interpretation is missed.
Predictions from Malthus to Paul Ehrlich to recent forecasts of peak oil after-effects have breathlessly proclaimed danger. I watched Lester Brown of the Worldwatch Institute in 1995 do a predictive presentation on Who Will Feed China. He’d written a book with that title.
The answer to Brown’s question? China itself. While importing substantial quantities of soybeans and vegetable oil it is quite adept at meeting its own food needs and exporting very large quantities of foodstuffs and value-added products to the world.
Where is Buffet’s “host of competitors” battling for supremacy? Everywhere.
I can cite examples of basic crop rotation and sound agronomy’s ability to triple and quadruple the productivity of land in Asia and Africa.
Then there’s wonderful technology not involving genetic modification but making use of plant genomes to bolster Mendel’s techniques in developing even better crops and nutritious food. Mega-competitors like Brazil, Argentina, and huge multi-national corporations that have bought land in the poorest nations will crank out food, feed, and fiber in the next 3 decades.
Errors in judgment like looking at autos in 1910 or TV sets in 1950 or hand-held converged devices today with rose-colored myopia abound. There’s no argument that strong demand is ahead but there are no clear, dominant, easy winners.
Heck, one of my clients, Motorola, is spinning off its well-known handset business and retrenching to the predictable, profitable platform that has been there for decades: two-way radios and similar technology. Personally I think it’s a solid, overdue strategic move.
Question the too-easy and too-optimistic assumptions. Widen your view. Look ahead. Identify the potential competition before it surprises you. And then adjust your strategy to compete in the good, but challenging times ahead.