{"id":84,"date":"2008-03-05T07:53:11","date_gmt":"2008-03-05T15:53:11","guid":{"rendered":"http:\/\/marketriders\/weblog\/?p=84"},"modified":"2017-04-02T16:00:00","modified_gmt":"2017-04-02T23:00:00","slug":"oils-wakeup-call-forbes-article-3508","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/","title":{"rendered":"Oil's Wakeup Call – Forbes Article 3\/5\/08"},"content":{"rendered":"

Martin T. Sosnoff<\/p>\n\n\n\n
<\/p>\n\n\n\n\n\n\n
Martin Sosnoff<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
\"pic\"<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/td>\n

\"\"<\/td>\n<\/tr>\n
\"\"<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Oil at $100 a barrel is a wakeup call for investors and politicians alike. You can’t blame ExxonMobil<\/strong> for making $11 billion quarterly. Prices are set by the futures market, not in boardrooms or coffee houses in Riyadh.<\/p>\n

Normally,
\nI avoid commodity plays, but I’ve joined the crowd. I despise gold,
\ncopper, iron ore, potash and coal because, after all, mines are just
\nholes in the ground. It’s more elegant to analyze tech houses. Mining
\nor finding oil is capital intensive, while tech houses like IBM<\/strong> (nyse:
\nIBM<\/a> –
\n news <\/a> –
\n people <\/a>), Google<\/strong> (nasdaq:
\nGOOG<\/a> –
\n news <\/a> –
\n people <\/a>) and Apple<\/strong> (nasdaq:
\nAAPL<\/a> –
\n news <\/a> –
\n people <\/a>) are brain trusts with loads of free cash flow.<\/p>\n

The
\nweighting of energy and commodities in the S&P 500 Index
\napproximates 16% of its valuation and over 20% of earnings.
\nTechnology’s weighting is the equivalent of energy and commodities, so
\nif you’re overweighted in tech and underweighted in holes in the
\nground, you could suffer sizable underperformance. The value sector
\nthis year has pulled ahead of Russell’s Growth Index, reversing last
\nyear’s wide disparity.<\/p>\n

Suddenly, I’ve got religion, rapidly building up my participation in energy and commodity plays.<\/p>\n

If
\nyou want to dream about oil prices long term, the go-to guy is Matt
\nSimmons, chairman of Simmons and Company International. Simmons’ thesis
\ncalled “the Peak Oil Thesis” is awesomely simplistic: The elephantine
\noil fields of Saudi Arabia peak out in a few years. Unfortunately, this
\nis only a working hypothesis.<\/p>\n

Saudi Aramco technocrats won’t let
\nSimmons near their reservoirs or seismic research data. They claim a
\nreserve margin of several million barrels a day. Simmons’ competition,
\nCambridge Energy Research Associates in Massachusetts takes the Saudi
\nside of the argument, but the market these days is siding with the
\nbears on net worldwide incremental production possibilities.<\/p>\n

The
\nnext five years will tell the story. I’m leaving out the demand side of
\nthe U.S. equation. If you believe our next president and the Congress
\nwill draft a cohesive energy policy that curbs demand and successfully
\nencourages new energy sources, you don’t want to play in this game.
\nJust be mindful that we have over 100 million cars on the road, gas
\nguzzlers, and they’re going to hold the road over the next 10 years.<\/p>\n

Oil
\nnow accounts for 95% of transportation energy, and Simmons and others
\nbelieve future growth in oil demand is inexhaustible. I never knew
\nanyone who could predict the price of oil accurately for more than six
\nmonths. The consensus historically runs wide of the mark, expecting
\ndemand to peak and prices to collapse from supply sources. The classic
\nmagazine cover story in The Economist<\/em> in March 1999 projected
\n$5 a barrel oil, that the Saudis would flood the world with cheap oil
\nand demand would peak. How wrong can you get it?<\/p>\n

Actually, oil
\ndemand the past 10 years grew 1.5 million barrels per day, and the cost
\nto find new oil keeps rising. The problem for many oil producers is
\nthat they fail to replace reserves. Exxon keeps its exploration budget
\nflattish. If they didn’t, profit margins would drop meaningfully. <\/a> For
\nmost oil operators, costs are rising 10% to 15% annually.<\/p>\n

The
\nanalyst consensus for oil hangs in the mid-$80 range. If oil stays
\nabove $100, earnings estimates are 15% too low for 2008. This could be
\none of just a few upside surprises for a major sector of the market
\nthis year. Long-term forecasts range much lower–$70 to $85 a barrel.
\nCommodity traders taking the long side on far out futures contracts
\ntook home fortunes the past few years.<\/p>\n

The demand side for oil is
\ncompelling when you look at incremental increases for China, India and
\nother emerging economies. Demand could grow by 1.5 million barrels a
\nday for the next 10 years. Considering the decline rate in existing oil
\nfields, the world needs some 37 million barrels of new capacity to keep
\npace. This is a big number. To the extent it’s unfulfilled, oil prices
\nwill rise until they trigger demand destruction. So far, demand
\ndestruction remains a vague, iffy concept.<\/p>\n

Meanwhile, the North
\nSea oil fields are in rapid decline. Output from Mexico’s Cantarell
\nField, second largest in the world, has already fallen 41%. Oil
\ndiscoveries peaked in the 1970 to 1980 decade. Very little production
\ncomes from fields discovered since 2000. Only 15% of production is from
\nfields discovered in the 1990s.<\/p>\n

The decline rate for the world’s
\noil fields remains a debatable issue. Cambridge Energy Research
\nAssociates charts it at 4.5% per annum. It may be much higher, but the
\nMideast situation remains unfathomable. If Middle East oil production
\nflattens out within a few years, world production could easily decline
\n5% over the next 20 years. Maybe the Saudi claim of production
\nenhancement is true, but they will make the world pay if they are the
\nsole major swing producer.<\/p>\n

Alternative energy supplies don’t
\ncover the transportation sector. Nuclear power, solar energy and wind
\ncreate electricity. Who knows when we’ll see a viable battery-driven
\ncar that’s acceptable in terms of power, range and price point.
\nRailroads are more efficient than trucks. Liceplyumidmo<\/a> . I own Union Pacific<\/strong> (nyse:
\nUNP<\/a> –
\n news <\/a> –
\n people <\/a>) as a play on rising grain and coal shipments worldwide.<\/p>\n

The
\ndeep basic is the world’s oil supply probably won’t ever exceed 100
\nmillion barrels a day, but demand could reach 100 million barrels by
\n2015. If oil prices for the U.S. go to $150 a barrel, oil costs would
\nmove from 8% of gross domestic product (GDP) to the 10% level.<\/p>\n

Rising
\noil prices could reduce GDP by half a point, annually. This condition,
\nhopefully would precipitate a new consensus that the demand side for
\noil must be dealt with even if the states and federal government tax
\nauto producers, car buyers and car owners, forcing conversion to 40
\nmiles per gallon automobiles. GDP in China and India would come in a
\ncouple of percentage points lower on $150 oil, crimping the case for
\ncommodity plays of all kinds.<\/p>\n

The law of unintended consequences applies here.<\/p>\n

I’ve
\ncome full cycle, so I want to be careful what I wish for. Conceptually,
\nI prefer technology plays like Apple and Google because they make us
\nmore efficient and comfortable. The Internet enriches our lives
\nseamlessly; iPhones get cheaper and faster with 3G spectrum coverage
\ncoming soon. Filling your gas tank with $5 a gallon flashing on the
\npump won’t make you happy unless you own a refinery.<\/p>\n

Twenty-five
\nyears ago, the energy sector reached 25% of S&P 500 valuation. At
\nits low it was 6%, now 11%. If oil surges back to 25% of the index, it
\nwill happen in the next couple of years.<\/p>\n

Oil falls into the value
\nsector of the market, not where I normally function, but I have to play
\nthe game. In the 1950s and 1960s, T. Rowe Price made his reputation
\n“discovering” natural resource plays of all kinds. Price believed they
\nwere growth stocks. Fifty years later he may be right.<\/p>\n

Martin T. Sosnoff is chairman and founder of Atalanta\/Sosnoff
\nCapital, a private-investment management company with over $8 billion
\nin assets under management. Sosnoff has published two books about his
\nexperiences on Wall Street,<\/em> Humble on Wall Street and<\/em> Silent Investor, Silent Loser. He was a columnist for many years at <\/em>Forbes magazine and for three years at the<\/em> New York Post. Martin
\nSosnoff owns personally, and Atalanta\/Sosnoff Capital owns for clients,
\nthe following stocks cited in this commentary: Apple, Google, IBM,
\nVale, Transocean, Occidental Petroleum, Freeport-McMoRan Copper,
\nMosaic, Potash and Union Pacific.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Martin T. Sosnoff Martin Sosnoff Oil at $100 a barrel is a wakeup call for investors and politicians alike. You can’t blame ExxonMobil for making $11 billion quarterly. Prices are … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[5],"tags":[],"yoast_head":"\nOil's Wakeup Call - Forbes Article 3\/5\/08 | MarketRiders<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Oil's Wakeup Call - Forbes Article 3\/5\/08 | MarketRiders\" \/>\n<meta name=\"twitter:description\" content=\"Martin T. Sosnoff Martin Sosnoff Oil at $100 a barrel is a wakeup call for investors and politicians alike. You can’t blame ExxonMobil for making $11 billion quarterly. Prices are … Read more →\" \/>\n<meta name=\"twitter:image\" content=\"http:\/\/www.forbes.com\/media\/authors\/martinsosnoff.jpg\" \/>\n<meta name=\"twitter:creator\" content=\"@marketriders\" \/>\n<meta name=\"twitter:site\" content=\"@marketriders\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"MarketRiders\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/\",\"url\":\"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/\",\"name\":\"Oil's Wakeup Call - Forbes Article 3\/5\/08 | MarketRiders\",\"isPartOf\":{\"@id\":\"https:\/\/www.marketriders.com\/investing\/#website\"},\"datePublished\":\"2008-03-05T15:53:11+00:00\",\"dateModified\":\"2017-04-02T23:00:00+00:00\",\"author\":{\"@id\":\"https:\/\/www.marketriders.com\/investing\/#\/schema\/person\/f2be262f5c0f3ed5ad50d6c40640ba8c\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.marketriders.com\/investing\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Oil's Wakeup Call – Forbes Article 3\/5\/08\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.marketriders.com\/investing\/#website\",\"url\":\"https:\/\/www.marketriders.com\/investing\/\",\"name\":\"MarketRiders.com\",\"description\":\"How To Become A Better Investor\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.marketriders.com\/investing\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.marketriders.com\/investing\/#\/schema\/person\/f2be262f5c0f3ed5ad50d6c40640ba8c\",\"name\":\"MarketRiders\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.marketriders.com\/investing\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/8e06113f594828daaf313d283544d566?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/8e06113f594828daaf313d283544d566?s=96&d=mm&r=g\",\"caption\":\"MarketRiders\"},\"sameAs\":[\"https:\/\/www.marketriders.com\"],\"url\":\"https:\/\/www.marketriders.com\/investing\/author\/support\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Oil's Wakeup Call - Forbes Article 3\/5\/08 | MarketRiders","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/","twitter_card":"summary_large_image","twitter_title":"Oil's Wakeup Call - Forbes Article 3\/5\/08 | MarketRiders","twitter_description":"Martin T. Sosnoff Martin Sosnoff Oil at $100 a barrel is a wakeup call for investors and politicians alike. You can’t blame ExxonMobil for making $11 billion quarterly. Prices are … Read more →","twitter_image":"http:\/\/www.forbes.com\/media\/authors\/martinsosnoff.jpg","twitter_creator":"@marketriders","twitter_site":"@marketriders","twitter_misc":{"Written by":"MarketRiders","Est. reading time":"6 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/","url":"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/","name":"Oil's Wakeup Call - Forbes Article 3\/5\/08 | MarketRiders","isPartOf":{"@id":"https:\/\/www.marketriders.com\/investing\/#website"},"datePublished":"2008-03-05T15:53:11+00:00","dateModified":"2017-04-02T23:00:00+00:00","author":{"@id":"https:\/\/www.marketriders.com\/investing\/#\/schema\/person\/f2be262f5c0f3ed5ad50d6c40640ba8c"},"breadcrumb":{"@id":"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/www.marketriders.com\/investing\/oils-wakeup-call-forbes-article-3508\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.marketriders.com\/investing\/"},{"@type":"ListItem","position":2,"name":"Oil's Wakeup Call – Forbes Article 3\/5\/08"}]},{"@type":"WebSite","@id":"https:\/\/www.marketriders.com\/investing\/#website","url":"https:\/\/www.marketriders.com\/investing\/","name":"MarketRiders.com","description":"How To Become A Better Investor","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.marketriders.com\/investing\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.marketriders.com\/investing\/#\/schema\/person\/f2be262f5c0f3ed5ad50d6c40640ba8c","name":"MarketRiders","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.marketriders.com\/investing\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/8e06113f594828daaf313d283544d566?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/8e06113f594828daaf313d283544d566?s=96&d=mm&r=g","caption":"MarketRiders"},"sameAs":["https:\/\/www.marketriders.com"],"url":"https:\/\/www.marketriders.com\/investing\/author\/support\/"}]}},"_links":{"self":[{"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/posts\/84"}],"collection":[{"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/comments?post=84"}],"version-history":[{"count":3,"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/posts\/84\/revisions"}],"predecessor-version":[{"id":11590,"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/posts\/84\/revisions\/11590"}],"wp:attachment":[{"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/media?parent=84"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/categories?post=84"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.marketriders.com\/investing\/wp-json\/wp\/v2\/tags?post=84"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}