ENERGY
SPIKES COULD SURPRISE INVESTORS
by Joseph Dancy,
LSGI Advisors, Inc.
Adjunct
Professor, SMU School of Law
February 7, 2004
We were interviewed on our
market outlook by several news organizations last month after our
analysis of the natural gas sector was published on EnergyPulse.net and
on Jim Puplava’s Financial Sense website.
One journalist asked us what unexpected trends or events we might see in the next two or three years – events that will surprise most governmental and business leaders in the U.S. – and how they might impact investors. The following is our reply:
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World crude oil prices could spike to $60 a barrel – or more (versus $34 a barrel now) – as: (1) OPEC decides to set the price of oil with a basket of currencies as the dollar continues to decline; (2) China’s oil imports increase 25% annually and it becomes the number two oil importer after the U.S.; (3) serious questions or disputes arise about successors to the current Saudi leadership; (4) Venezuela oil production is interrupted due to political issues relating to the current recall election; (5) Iraq production continues to disappoint with violence and sabotage continuing; (6) Nigeria production is periodically interrupted with strikes and other violence; (7) production from Saudi Arabia’s largest oil field peaks and begins to decline, with massive expenditures needed to maintain output; (8) numerous major energy companies reduce the engineering estimates of their proven oil and gas reserves as reported in their SEC filings; and (9) terrorists target crude oil infrastructure – most likely large ocean going crude oil tankers or pipelines.
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Natural gas prices in the U.S. and Canada could spike to over $15 a thousand cubic feet (versus $5 now) as: (1) North American production declines; (2) demand for natural gas from newly built natural gas electrical generating units and from new residential units increases sharply, surprising many; (3) Canada attempts to restrict the sale of natural gas to the U.S. market to alleviate shortages of cheap natural gas and to provide fuel for domestic heating purposes; (4) several chemical and fertilizer companies in the U.S. that rely on natural gas as a feedstock lay off hundreds or thousands of workers and move these jobs and plants overseas – but the decline in demand only has a marginal impact on natural gas prices; (5) local opposition and legal challenges to liquefied natural gas (LNG) imports cause permitting delays; and (6) governmental investigations focus on alleged manipulation of the natural gas futures market by traders.
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The price of gold could exceed $600 an ounce (versus $400 now) as the value of the dollar continues to decline against most of the major world currencies, and: (1) the Federal Reserve sharply increases interest rates in an attempt to stabilize the value of the falling dollar; (2) a record number of individuals file for personal bankruptcy in 2004 in the U.S. only to be exceeded by the rate in 2005; (3) more companies reduce pension benefits to retirees and existing employees; (4) the government announces a massive bailout of the agency overseeing the pension funds of failed companies much like the bailout of the S&L’s a decade earlier; (5) one or more major U.S. airlines file for bankruptcy, in part due to higher fuel costs; (6) world economic growth, except for China, slows to a crawl; (7) tuition at public universities increase at a double digit rate; and (8) health care costs continue to rise at a double digit rates.
Individuals and investors in the energy, precious metals, security, drugs and health care, military area of the high technology sector, and commodity sector do very well. Many others do not. The divide between the “haves” and “have-nots” in the U.S. will continue to grow.
© 2004 Joseph Dancy
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Joseph Dancy, Adjunct Professor
Oil & Gas Law,
SMU School of Law
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