Stephen Leeb, Ph.D, is president and investment committee chairman of Leeb Capital Management in New York and portfolio manager for the U.S. Global Investors MegaTrends Fund (MEGAX). Dr. Leeb is an authority on the stock market, energy trends and personal finance. This article is adapted from his exclusive webcast “The Oil Factor” for U.S. Global Investors.
One of the hallmarks of the price gains in oil has been the incredible skepticism on the part of virtually everyone involved as those gains occurred.
I’ve written two books about this subject in a couple of years. The first, The Oil Factor: Protect Yourself and Profi t from the Coming Energy Crisis, was meant to be an investment guide. When I started writing that book, I thought oil would be a big topic, that prices would rise, and they did.
But I was dead wrong on one thing. I fi gured that if oil got to $50 a barrel or so, it would become a national priority — that we would get very worried and start doing something about it. Well, oil got to about $40 or $50 a barrel and nothing happened. That’s why I wrote a second book, The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel.
Not many people at this point really believe we have a problem regarding energy. There is not one fi rm on Wall Street today that believes oil prices, or any energy price or even any commodity price, are in a long-term uptrend. Wall Street is projecting fi ve or six years out that the price will be around $38 a barrel.
With this skepticism come low share prices and little likelihood that you’re going to see the kind of capital expenditures needed to solve this energy problem. I mean, who is going to spend a fortune if you think the terminal price on oil is $38 a barrel? Are you really going to invest heavily in drilling or alternative energy? It’s just not going to happen.
The projections of the U.S. Department of Energy — the agency that oversees energy policy in the United States — indicate that it also doesn’t see a long-term problem. The DOE foresees that in 15 years oil will sell for around $28 a barrel — the same projection before oil prices began their rapid climb.
But one thing has changed in the past two years. The DOE now assumes the United States will be able to import more oil than it previously expected. In other words, the DOE now thinks the world will be able to produce more than it thought possible in 2003. This view prevails despite the fact that Saudi Arabia doesn’t think it can produce as much as it once did, and it’s despite the fact that global demand today is higher than it was in 2003.
| GDP Growth (actual and forecast) |
| Year |
China |
India |
Japan |
USA |
| 2004 |
9.5% |
6.9% |
2.6% |
4.2% |
| 2005 |
9.9% |
6.8% |
2.8% |
3.6% |
| 2006 (est) |
10.7% |
8.5% |
2.8% |
3.3% |
| 2007 (est) |
9.8% |
7.7% |
2.1% |
2.2% |
| 2008 (est) |
9.3% |
7.4% |
1.5% |
2.9% |
| Sources: Economist Intelligence Unit; U.S. Energy Information Administration;
Chinese Government |
The greatest source of new demand for oil is coming from “Chindia,” meaning China and India. These are not only the world’s two most populous nations, with nearly 40 percent of the global population, they are also among the fast-growing emerging markets.The world has never been in a situation where 40 percent of its population is rapidly developing at the same time.
When measured by purchasing-power parity, Chindia’s combined economy right now is almost as big as the U.S. economy. There are, however, major differences between the United States and Chindia, and one of the most signifi cant is per-capita energy consumption. Chindia’s per-person energy use is only half the world average and only one-seventh that of the typical American. You can assume that energy consumption in China and India will continue to rise as long as economic growth continues.