Why the Next Spike in Oil Prices Will Dwarf the Last One

Ambassador Richard Jones, the Deputy Executive Director of the International Energy Agency, has some eye popping things to say about the energy space. The Paris based IEA was first set up as a counterweight to OPEC during the oil crisis in 1974, and has since evolved into a top drawer energy research organization with one of the best 30,000 foot views of the energy universe.

World GDP will grow an average 3.1%/year through 2030, driving oil demand from the current 84 million barrels/day to 103 million b/d. That means we will have to find the equivalent of six Saudi Arabia’s to fill the gap or prices are going up a lot. His ultra conservative target has crude at $190/barrel in twenty years, and his high priced scenario would send you rushing for a change of fresh underwear. 

Some 39% of that increase in demand will come from China and 15% from India. A collapse in investment caused by the financial crisis last year means that supply can’t recover in time to avoid another price spike. More than 1.5 billion people today don’t have electricity at all, but would love to have it. The best the Copenhagen climate negotiations can hope for is for CO2 to rise until 2020, and then plateau after that, because once this greenhouse gas enters the atmosphere it is very hard to get out. It would take 100 years of natural decay to get CO2 levels back to where they were just 20 years ago.

This will require a massive decarbonization effort reliant on nuclear, hydro, alternatives, and carbon capture and storage. Up to half of the needed carbon reduction can be achieved through simple efficiency measures, like ditching the incandescent light bulb, driving more hybrids, and closing dirty, old coal fired power plants. Natural gas will be a vital bridge, as it is cheap, in abundant supply, and emits only half the carbon of traditional fossil fuels.

The total 20 year bill for the rebuilding of our new energy infrastructure will exceed $10 trillion. Each year we kick the can down the road, this price tag rises by $500 billion. Now you know why I spend so much time on energy research.

Richard, who comes from a diplomatic career in Kuwait, Kazakhstan, and Israel, certainly didn’t pull any punches during my extended interview with him. I have been a huge fan of the IEA’s data base and forecasts since their inception. Better use the current weakness in oil prices to accumulate long term positions in crude through the futures (LOH10), the ETF (USO), the offshore drilling companies like Transocean (RIG), and leveraged oil and gas plays like Chesapeake Energy (CHK) and Devon Energy (DVN). When oil comes back, it will do so with a vengeance.

For more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com .