T. Boone Pickens, one of the legends of the oil industry, has come out recently to say he thinks oil prices will rebound to more than $100 a barrel in the next 12 to 18 months. He's been in the industry a long time, he says, and seen enough of the booms and busts to know that this dip is only temporary. Demand is bound to rise as the price drops, and any decline in drilling will put more upward pressure on prices.
Admittedly, I haven't been in the business as long as Pickens has. But I have been in it long enough to have seen a few boom and bust periods myself. And my experience is a little different from Mr. Pickens'. I remember, for example, when oil peaked at $37 a barrel in 1981 and that during the next six years it fell all the way to $10 a barrel. This fall, I might add, came at a time when the rig count was slashed more than 50 percent in the U.S.
Oil prices did recover somewhat in the 1990s, but even by 2001 they sat at just $20 a barrel. So at the end of a 20-year period — during which the U.S. rig count had fallen dramatically and economic growth in the U.S. and around the world had been very strong — oil prices were almost 50 percent lower than where they had begun. And that's without even adjusting for inflation.
I'm not sure where Mr. Pickens was during this time, but clearly high oil prices have not always been the norm. In fact, The Wall Street Journal recently published an article stating that what we're seeing now are not low gasoline prices, but rather more normal prices. It's the high prices we had for the last decade that were unusual. Those high prices were kicked off in the early 2000s by a combination of massive growth in China (now the world's second largest consumer of oil) and military conflict in Iraq that took a lot of oil off the market and created uncertainty about future supply.
Life was good for the oil industry in the years that followed, but the situation is turning. The war in Iraq is over and production there is booming. China is slowing dramatically, and all signs point to that continuing.
Many people assume that supply and demand will eventually even out, and of course that's true. But, it could take a while. Even if supply does go down somewhat — and keep in mind that it takes a while after drilling slows down before production follows — there's no reason to assume that demand won't continue to decline.
Contrary to popular belief, growth is not a given. The problems in China and around the world are not going away. I will discuss more about China's effect on oil and why so many people didn't see it coming in my next blog. In the meantime, we can all strap in for a period of low oil prices that will likely last for some time.
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of MacroView Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles.
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