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Oil at $80 a Barrel?

Written by Brian Hicks
Posted March 3, 2005

Dear Wealth Daily reader:

Last night, I was talking with a friend about the state of the world. Nice enough guy, but he knows nothing about geopolitics.

I mentioned to him the current--and worse yet, future--oil crisis.

He agreed that gasoline prices are ridiculous, and cleaning out his wallet.

But I'm sure my friend, like a lot of folks, figured that prices would decline at some point, and he'd be able to enjoy $.99 gallons of gas again. Just like in 1999.

Keep dreaming.

Never before has six years ago seemed like ancient history.

I told my friend that the situation is only going to get worse. I told him that according to the preeminent oil expert in the world (Matthew Simmons), the price of oil could get as high as $185 a barrel with oil hitting $80 barrels within the next two years. I said $3.00 a gallon gasoline is not far off.

He laughed at me, saying that'll never happen.

Not wanting to explain myself further, I simply said that $80 a barrel oil is a mathematical calculation. Nothing more. Nothing less.

And the fool didn't believe me.

He wouldn't take my word that oil prices are going through the roof, never to come back down again.

Now, I love a good argument, especially when the other person has no basis for his opinion, but I had to let go of this one, because he simply would not be convinced.

Even with all my facts-China's building a city the size of Philadelphia every month; the world is consuming more oil than is being produced; there's a worldwide scramble to find more sources of energy- he still would not believe me.

Then I asked him if he ever reads the news.

He said no.

I rested my case once and for all.

This headline came across the wire this morning:

Oil prices could hit 80 dollars in next two years: OPEC.

In the article, OPEC's acting secretary-general Adnan Shehab-Eldin had this to say:

"I can affirm that the price of a barrel of crude oil rising to 80 dollars in the near future is a weak possibility. But I cannot rule out (the possibility) of oil prices rising to 80 dollars a barrel within the next two years."

Read: Oil is going to $80 a barrel, and will probably stay above that price.

Shehab-Eldin said it was in the interest of OPEC and other countries not to see "big and surprising spikes in oil prices, but a gradual balance."

Read: A nice, steady uptrend in oil prices. But an uptrend nonetheless.

As you read this, oil is spiking to the upside. Take a look.

And the same thing is happening with gasoline, which is trading at record levels. Take a look.

The reason for the price spikes in oil and gas (besides the obvious)?

Well, there were a few other items that sent shockwaves throughout the market today.

First, it was announced that Mexico's largest producing oil field is expected to peak this year, quicker than first thought.

According to Petróleos Mexicanos (Pemex), Mexico's state oil monopoly:

"It expects production at its Cantarell oil field to begin declining this year, earlier than previously forecast.

Cantarell is the largest oil field in Mexico, and the eighth largest in the world. The field, which has been in production since 1979, had produced 2.11 million barrels per day in 2004. Pemex expects that to decline by 5% to 2.0 mbpd in 2005.

Pemex had earlier forecast that Cantarell, which accounted for more than 60% of Pemex' oil production last year, would not begin declining until at least 2006."

That, coupled with a warning from Iran, drove energy traders to the brink.

According WorldTribune.com:

"Iran has warned that Gulf Arab oil would be endangered by any U.S. attack on the Islamic republic.

In the first such threat, a leading Iranian official raised the prospect of Iranian retaliation against Middle East oil exports. The official said such Gulf Cooperation Council oil states as Kuwait and Saudi Arabia could be threatened.

"An attack on Iran will be tantamount to endangering Saudi Arabia, Kuwait and - in a word - the entire Middle East oil," Iranian Expediency Council secretary Mohsen Rezai said on Tuesday.

About 40 percent of the world's crude oil shipments passes through the two-mile wide channel of the strategic Straits of Hormuz. Iranian forces are deployed at the head of the channel. Oman and the United Arab Emirates are located on the other side.

Teheran could easily block the Straits of Hormuz and use its missiles to strike tankers and GCC oil facilities.

Within weeks, the rest of the world would be starving for oil and the global economy could be in danger.

The U.S. Energy Information Administration projects that oil tanker traffic through the Straits of Hormuz will rise to about 60 percent of global oil exports by 2025.

Rezai, a former commander of the Islamic Revolutionary Guards Corps and a candidate for president, told the Fars News Agency that any Western attack on Iran would send oil prices rocketing to $70 per barrel.

He said such a significant increase in oil prices would also be sparked by international sanctions on Teheran."

You can see why Wealth Daily thinks the 3-G's of the global economy (geology, groundwater, and geopolitics) are the major issues of this century.

Speaking of geopolitics, I've been getting questions regarding body armor maker Pacific Safety Products (PSP.V). The recent decline in PSP isn't a PSP-specific matter. Rather it's an industry matter. After the huge bull rally of the last two years, every single body armor stock has gone down at least 20% since December.

I believe some healthy consolidating is occurring in the body armor space. My opinion: Body armor is still in a bull market, if for no other reason then the tenuous geopolitical situation that is unfolding before our eyes.

Sincerely,

Brian Hicks
Wealth Daily
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