Banking & Finance

BULLS & BEARS: Making sense of market's oil turmoil will take time

March 21, 2005

The price of crude oil hit $55 a barrel last week. The oil "experts" are all over the news predicting doomsday scenarios of economic ruin.

Their concerns are that no new oil fields are being discovered, many of the oil-producing countries are run by kooks, fat Americans are buying bigger and bigger SUVs, and China's thirst for oil is just getting whetted.

All of these are valid and logical concerns. And Lord help us all if the Chinese take a liking to SUVs.

Recently on CNBC, a fellow named Matthew Simmons, who is president of an energy investment banking firm, projected a dire outlook on the future of energy prices. He claimed the Saudi fields are well past their prime and we could be on the verge of a huge energy calamity.

CNBC has been taking a poll on whether oil will hit $80 a barrel this year. I don't know much about oil, but I do know that when everybody is all excited about something and driving prices through the roof, it's often the wrong thing to be focusing on.

Oil is a funny commodity in that when there is just 1 percent or 2 percent too much of it above the ground, there is a glut. And when there is 1 percent too little above the ground, there is a shortage.

Ever since petroleum replaced whale oil as the fuel of choice, there have been predictions of doom concerning the remaining supply of oil. Look at this and see if you notice anything.

As Forrest Gump might say, "I'm not a very smart man, but it seems like there is gobs of the stuff under the ground."

Twenty-five years ago, the experts said we had 650 billion barrels left. Since then, the world has consumed all those 650 billion barrels and now we have twice as much remaining!

As the price of oil goes up, other sources of energy become more viable. According to The Wall Street Journal, in 1980 the U.S. produced almost no ethanol. Ethanol, a corn-based moonshine, is added to gasoline to stretch the fuel's supply. This year, the U.S. will produce 4 billion gallons of ethanol, and 25 new ethanol plants are under construction.

A lot of smart people are working on alternatives like fuel cells, hybrid cars, solar and wind power. Now even the founder of Greenpeace is a proponent of the expansion of nuclear power. Aren't humans a funny bunch?

But, when push comes to shove, and there is a buck to be made, we funny humans get pretty creative.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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