Is this the end of King Oil? Elon Musk is making a good fist at ending the rule of oil. Something Mr Musk said got me thinking, I quote,

“We’re running the most dangerous experiment in history right now, which is to see how much carbon dioxide the atmosphere… can handle before there is an environmental catastrophe.”

One of Elon Musk’s daring endeavors is to mass produce batteries for storing energy from renewable sources locally in the home, or in your car. That’s a massive threat to oil. Musk isn’t the only one Google’s autonomous cars are closer to reality than every one thinks. Naturally a world of autonomous transport will run on batteries, not on petrol.

What about the news flow from the media about oil?

Oil prices are going to $10 per barrel.
China going into meltdown due to the oil price drop. This is the start of a recession just look at the oil price, it’s tanking (or words to that effect).
There is a glut of oil in the market.
Renewable energy is taking over

Is this really the end of oil?

Not likely. The oil market is massive, just massive. Renewable energy has only just started making a dent on that. It’ll take more than a few Tesla’s to make a dent in that. Oil supplies are not growing very quickly any more, and new oils discoveries are increasing hard to make. Reducing supply in the long term. Of course, eventually something else will need to take over. Musk mentioned environmental catastrophe in his quote, environmental catastrophe that he is talking about takes a long time to play out, giving the oil market plenty of time to recover.

Projecting cynicism onto the world is not one of the underlying aims of Let’s Compare Bets, but, allowing a bit of cynicism for a minute, all the news flow makes us feel that ‘they’ are shaking the tree. You might ask what are you talking about: shaking the tree, what none sense. Tree shaking is a tried and tested technique being used to shake out equity investors holding investments. Put simply, scare them, make the them panic and sell. After the majority have sold institutions buy in really cheap. The time must be approaching to buy in cheap.

Oil prices work in cycles, as do many things, business cycles, and, various processes in nature. In terms of supply and demand, demand for oil remains strong especially in countries like China whose population is driving more cars and inevitably using more oil. Country’s economies seem to be in a mid cycle slow down not recession indicating that demand is unlikely to reduce significantly. What about supply? There seems to be a glut of oil at the moment caused by Opec countries not reducing their quotas, and, the easing of US – Iranian relations that will allow Iran to start increasing their supply of oil to a larger market.

Here is a long term oil price chart

Long term oil price analysis

Going slightly off topic a moment, notice what happened in the early 1970’s. Oil prices shot up significantly when compared with what had happened before. Looking at the top of the chart you’ll notice that volumes rose significantly too. Interestingly this correlates nicely with something that President Nixon did in 1971, discussed before in the post on DYI retirement planning using a SIPP (in the big trends section). That phenomenon has been driving characteristics of various asset markets ever since. I should say possibly, because I am not professor of economics and I don’t have a team of PHD students to help me prove causation either.

Keeping with the chart, the peaks and troughs of this cycle are shown with red circles. Peak to peak took roughly 29 years and trough to trough to 26 years. Before 1971 the previous peak was in about 1945 26 years before.

In the previous cycle to the one we find ourselves in now the time it took from peak to trough was roughly 18 years. We are currently 10 years from the previous peak.

Time to place bets

Assuming the future will take some direction from the past and in some sense become self fulling we’d take a guess that the next 5 – 10 years will see lower oil prices. Oil companies will see the lower prices feed through to their results over the coming quarters which will punish their share price. There will be some excellent buying opportunities to be had. Oil prices will most likely bounce around bit before hitting the bottom, in part, due to oil companies reducing supply.

As far as suggestions for investments to go: on your watch list you may want to consider BlackRock Commodities Income Investment Trust (BRCI), rather than betting on one oil producer alone. One of the biggest holdings is Exxon Mobil (XOM), apart form being the world’s biggest oil company, it is able to stay profitable at lower oil prices than it’s competitors, increasing the chances that their dividend payment will not be cut.

Disclosure; the author holds an investment in BlackRock Commodities Income Investment Trust.