By Kirk Spano
In Pennsylvania, from 1859 to the 1870s, America saw its first oil rush. The Texas oil boom was soon to follow in the early 1900s. By 1970, U.S. oil production peaked at 9,637,000 barrels per day. Just a few short years later, the United States was faced with an energy crisis perpetuated by OPEC in the face of our inability to balance domestic supply and demand for oil.
The U.S. response to the energy crisis was to establish deeper relations with Saudi Arabia. For more than three decades the United States saw declining production of her own oil while she imported more and more. However, in 2009, something finally began to change. For the first time since 1981, American oil production showed a year over year increase in production. This would not be a one-time event.
Over the past six years, U.S. oil production has risen in every year. Even this year, with cutbacks in capital spending, it looks like production will continue to tick upward to be very near or even slightly above the record set in 1970. Next year might be a different story.
In 2011, when I was awarded the " Next Great Investing Columnist " title, the column which won that competition was titled " The One General Thing That Changes Everything for America. " In that column, and about dozen subsequent columns in 2012, I talked about how a developing boom in domestic oil and gas production would completely change global economic and geopolitical dynamics.
By last year, the changes in economics and power had become very evident to those paying attention. Volatility around the globe is not unrelated to the fact that America is no longer energy dependent. In response to that new reality, Saudi Arabia allowed the price of oil to plunge, something I foreshadowed in my June 5 column " The Peak Oil Plateau and What it Means to Investors. "
In that column, I anticipated that "out of the ordinary price plunges" in oil could occur and that would open the door "for unique leverage opportunities by enterprising investors." What I did not anticipate is how fast the demand destruction for oil I have discussed before is really developing. Just this week, we saw the G7 agree to cut carbon emissions a record amount in the next three-and-a-half decades and end fossil fuel use altogether this century.
In the past few years, we have already seen an extended flat period in oil demand, due to the financial crisis, that has only recently shown modest gains according to the International Energy Agency . With a concerted effort by governments to curb oil use and new available supplies of petroleum in the United States, the peak oil plateau I described last year should be coming into focus. In coming years, presuming no substantial geopolitical shocks, oil demand will struggle to keep pace with oil supply, keeping pressure on oil prices. Ultimately, probably in the 2020s sometime, the beginning of mass adoption of electric vehicles will begin to put a significant dent in oil demand as transportation is over 60% of all petroleum used globally (about two-thirds in the United States).
Those are the sorts of things that should make would be investors in oil stocks, start to look at solar and electric vehicle stocks either instead of, or at least in addition to, oil company stocks. That is not to say that there won't be oil stocks to invest in eventually, however, picking the share-price winners is going to be difficult and it seems to me that the shakeout is not complete. At a minimum, investors should expect dilution, and more likely a few more bankruptcies or "take-unders."
Companies like a former favorite of mine, Whiting Petroleum /zigman2/quotes/204602363/composite WLL +2.96% , might not come out of this intact after the oil-price collapse and aggressive purchase of Kodiak Oil & Gas — a company whose stability I warned about back in late 2013. It would not be surprising to see Whiting purchased for only a slight premium to their currently beaten down price due to their debts. Oasis Petroleum /zigman2/quotes/222659909/composite OAS +0.11% and Continental Resources /zigman2/quotes/200740136/composite CLR -0.38% , both companies I recommended buying in 2012 before big runs upward, might not fetch significant premiums either. Both companies are suffering from high debt, and Continental's Harold Hamm made a terrible mistake lifting the company's oil price hedges last September.
The main reason to buy a few oil stocks sometime soon is as a hedge on geopolitical risk. To that end, my clients and subscribers have a few names handy for when the prices come to us. However, as David Einhorn pointed out a month ago, it is probably better to have a hedge in actual oil, if you are worried about a spike in price. To buy oil, be extremely careful if you are tempted to buy one of the ETF/ETN products, such as the United States Oil Fund /zigman2/quotes/203483736/composite USO +0.60% or iPath S&P GSCI Oil Trust /zigman2/quotes/204600377/composite OIL +0.65% , which both suffer from contango degradation more often than not if held longer than a few weeks.
With the collapse in the price of oil and oil stocks, many investors today are looking toward oil stocks for great value opportunities. Most of them are likely to fall into value traps in the short-term. In the long-term, the opportunities might not be as clear cut as in the past. The age of oil has now begun to end, and that means at least more volatility, so be aware and beware, the world is changing in a massive way.
Disclosure: Kirk and certain clients of Bluemound Asset Management do not own any of the securities mentioned. Kirk has not recommended at this time any of the securities mentioned in his investment letter Fundamental Trends. Neither Kirk nor Bluemound clients plan any transactions in the next three trading days. Opinions subject to change at any time without notice.