(un)Hot Commodities?

Energy Key Stats 2008

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Above you will find the International Energy Agency's Key World Energy Statistics report for 2008. A few statistics that jumped out at me are the following:

On Page 6 (of the document, not the PDF viewer),

In 1973, 46.1% of our energy came from oil.

In 2006, 34.4% came from oil, down by over 25%.

Page 24,

Look at how electricity generated from oil has dwindled over this time period, 1973 to 2006, from 24.7% to a mere 5.8%, down by over 76%. Whereas the nuclear segment has grown by nearly 350%. In fact, world nuclear production as a whole is up nearly fourteen fold.

Page 33,

In 1973, 45.4% of world oil consumption was used in transportation.

In 2006, 60.5% was used in transportation, up 33%, with industrial use down by over 50%.

In other words, possibly the most crucial part of the transition away from oil use will be an economically-viable engine that does not run on refined products like gasoline and diesel. This will fundamentally change the world's supply and demand for crude oil.

As for making investments in crude oil futures contracts (or an ETF proxy), consider the fact that the world energy supply has trended up since about 2001, as is visible in the attached report. According to the International Energy Agency:

“Global oil demand is now expected to contract in 2008 for the first time since 1983…with the total this year revised down to 85.8 million barrels per day. World oil supply growth slowed in November, averaging 86.5 million barrels per day.”

In other words, supply exceeds demand – leading to lower prices – which will probably continue or roughly balance over the coming years. As I discuss in a recent article, capacity and supply have been ramped-up dramatically over the past few years, in response to record prices, which is reflected in the IEA's current world energy assessment.

One of my concerns is that higher oil prices have become the consensus view. Investors like Jim Rogers or Matthew Simmons are now guru figures, whereas they were virtually unheard of back in 2000. (Back then, dot-com gurus dominated the news and published books.) The consensus view is never correct; or at least for very long, until it ends poorly.

My current view is that we will undoubtedly go through another "tight" period where oil either reaches or exceeds its old highs; but this could be five years from now, comparable to what happened in the 1970s.

In 1973, the Yom Kippur War caused oil prices to skyrocket. But then oil didn't reach its peak again until 1979. For the intermediate period, 1974 to 1978, oil traded flat at roughly $13 per barrel.

Indeed, even in the middle of a secular bull market, oil can prove to be a bad trade for fairly extended periods of time. And when it does heat up, like all commodities, it tends to come in the form of a sharp boom and bust.