I’m long term bullish on oil. $80 oil is already a pretty heady price versus what we started the decade at (somewhere around $20). I think it is pretty hard not to be bullish on oil going forward once you do some reading and discover two things:
1) All of the super giant oil fields in the world were discovered in the 1960s or earlier. As the production from these fields which are so vital continues to decline we just can’t add enough new production every year to offset the declines AND grow production. The world isn’t running out of oil. It is just running out of the really easy to find, easy to extract kind that comes out at prodigious rates.
2) While we fight to stay on the treadmill by adding production to offset declines in the super giant fields we also have another problem. Global demand is increasing and will continue to do so as the developing countries move towards a more Western lifestyle. If you look at the number of cars per person in India and China you will see that both of these countries of a billion plus people have a miniscule fraction of the cars per person in the USA. That is changing and it doesn’t take much of change on a population base of over 2 billion people to make a big difference in global oil demand. The United States has 25% of the current daily oil demand in the world with 300 million or so people. Imagine if China and India had a per capita use of even 25% of what the United States does on their 2 billion.
But I’m no genius. So I try to confirm my beliefs by seeking out the opinion of those that I respect. And there are none that I respect more than Munger and Buffett.
Here is what they had to say on the subject at the 2008 Berkshire Annual meeting:
WB: Oil won’t run out - it doesn’t work this way. At some point the daily productive capacity will level off and then start declining gradually. There is the depletion aspect and the decline curves. We are producing 86m barrels per day or so, more than ever produced. We are closer, by my calculations, to almost our productive capacity, than we have ever been. I think our surplus capacity is less, and quite a bit less, than in past. Whatever that peak is, whether 5 or 10 yrs, the world will adjust, and we will think about it. Adjustments will cause demand to taper off. I don’t know how much oil is there, but there are lots of barrels of oil in place. We never recover total potential. We may have better engineering recovery in future. It is nothing like an on and off switch. You may still have enormous political considerations to get access to avail oil since it so important. There is nothing you can do over short period of time to wean world off oil.
CM: If we get another 200 yrs of growth dispersed over the world while population goes up, all oil coal and uranium will run out so you will have to use the sun. I think there will be some pain in this process. I think it is stupid to use up hydrocarbons of world so quickly. Stupid when there are few and limited alternatives. What should we have done? We should have brought all the oil over from Middle East and put it in our ground. Are we doing it now? No. Government policy is behind in rationality. If we have prosperous civilization, we must use the sun.
WB: Charlie, what is your over/under for oil production in 25 yrs?
CM: Oil in twenty five years, down.
WB: If this is true, that is big number. China is doing 10m cars this year, so down in 25ys is significant.
The financial crisis gave us a break from the $120 per barrel oil we had in 2008 as economies slowed and demand declined. There will be peaks and valleys in oil prices going forward but make no mistake the trend is going to be up.
About 40 people out of 1,000 in China have a car, fewer in India. In North America that number is more like 800 out of 1,000. Demand will rise, and the supply side is no brighter.
I’m trying to prepare my portfolio with undervalued oil reserves. I’m compiling my ideas here for anyone interested in discussing further.