Oil Above $110 — Oil Service Companies Set To Rise…

by BWK ~ March 18, 2008

Oil Above $110…

How about that price of oil? It breached the $110 per barrel mark this week and still has room on the upside. Kevin Kerr and I have been predicting this for at least three years. The future is now.

This high price for oil is bad news at the gas pump, but great news for the oil service companies out there. Everyone who has a prospect is drilling. That is, if they can get a rig, pipe, bits and personnel. Good for Halliburton (HAL: NYSE) , Baker Hughes (BHI: NYSE) and Superior Energy Services Inc. (SPN: NYSE) .

Looking around, Russian energy exports are near the level of $1 billion per day in value. That’s a lot of rubles. This brings in immense sums for social and military spending by Russia. And Russia has been buying gold to build up its monetary reserves. But this oil money also creates inflationary pressure.

Russia is turning into a petro-welfare state (except without the welfare, some might argue). And Russian oil producers complain that the government’s high taxes are taking all of the incremental profits. So the Russian energy sector generally lacks funds to invest in new field development. For an example of what happens over the long term, see the results in Mexico, where the overmilked Pemex cannot recapitalize.

Along those lines, our buddy the inimitable Michael Economides of the University of Houston has offered his opinion on U.S. energy policy. Actually, he has offered his viewpoint with both barrels:

“It is certain that the United States is in for an energy price and supply shock the likes of which we have never experienced or imagined. While high prices, to a reasonable extent, can be tolerated, hell will break loose if massive supply disruptions emerge. We are much closer to them than people think. Those who think that we can conserve ourselves to energy independence… are vastly wrong.”

Economides continues:

“The U.S. — the world’s reigning superpower — has come under the control of a situation generated by energy-militant countries such as Venezuela, Iran and Russia. Importing more than 60% of its oil consumption while the national debate is dominated by upper middle-class ideologues who are fanatically averse to exploiting America’s own resources, we have become dangerously vulnerable to oil prices that cannot be rationalized by any economic model. Except, of course, the irrational geopolitical components fomented by countries that have the United States exactly where they want it to be. Those same countries also can cause the far more devastating to our economy supply disruptions.

“Oil supply and demand is a margin business where 0.5% of over- or undersupply can generate havoc on the market. There is ample historical evidence that such small discrepancy has caused huge fluctuations in the oil price, perhaps 30% or more.”

As you can probably figure out, Michael Economides is no shrinking violet.

Until Next Time…

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Additional Resources
Market Insight - Fundemental Resource Demand Is There
$225 Per Barrel - The New Gov’t Standard For Oil