The Oil Spigot May Be Closing
A few days ago, in one of Walt Disney World's cold, cavernous hotel ballrooms, a tall, silver-haired man took the podium. He would turn 70 in two days, and he was hoarse. But for this meeting of financial advisers, he had a warning, one so grave he has resolved to keep sounding it as best he can. So he pressed on.
Visionaries, whom I define as anyone predicting anything more than 36 months away, rarely get my attention. But Charles Maxwell, senior energy analyst for institutional broker Weeden & Co., is an exception. And not just because three decades back he coined the term "energy crisis," or because he has often proved correct in calling oil's swings. Now, he thinks that oil prices by 2006 or so will be sharply and permanently higher--an inevitability that will put the U.S. in a serious economic and political bind.
This view runs counter to today's market, which after a pop upward after September 11 has seen oil fall in price, from $27 a barrel before the attacks to $22 lately. To Maxwell, it's not just that the price doesn't fully reflect the greater risk of an interruption in the flow of oil from the Mideast with the U.S. at war and Saudi Arabia more unstable than ever. Despite slow global growth, the oil market remains tight. By next summer, when Maxwell expects the economy and energy use to pick up, oil prices will turn up, too. "We're going to see tighter and tighter conditions," he said. "We're at the bottom now, at $22."
TAR SANDS. While spikes up or down are always possible, Maxwell means a long-term bottom. He sees crude prices, which since 1974 have typically ranged from $10 to $30 a barrel, slowly trending higher as non-OPEC oil fields play out. Unlike some petro-pessimists, Maxwell doesn't pinpoint a date when world production will peak. That entails too many imponderables, such as Iran and other relatively closed states where credible oil-field data are scarce. But non-OPEC production is more readily figured. He sees non-OPEC output, even with the big, new Caspian Sea fields, topping out in 2005 to 2007. "That's where the rubber will meet the road," Maxwell said. "The non-OPEC world will have to repair to the OPEC world and say, `Please, sir, may I have more?"'
Six nations--Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates, and Venezuela--will be able to pump extra barrels to feed rising global demand. But they also will enjoy stronger pricing power. "They see a golden age dawning for them," Maxwell said. As OPEC nations make up for years of--in their view--being short-changed, oil prices will rise, faster than inflation, year after year. "The SUV would be thrown onto the ash heap of history," he said. "We would all have to change our lifestyles."
Not every energy analyst sees it this way. DRI-WEFA Chief Energy Economist Michael Lynch says output models used by Maxwell and other pessimists are inherently flawed. "Ninety-eight percent of the forecasts are too low," he told me. Yet if Maxwell is even partly right, the implications for investors would be vast. He thinks oil-service outfits such as Baker Hughes will benefit from fresh exploration, while production companies with unusual reserves, such as Canadian and Venezuelan tar sands, will be revalued upward (table). Any industry, from autos to cement, that relies heavily on energy will find its profit growth handicapped.
The social dislocations and political upheavals worry Maxwell most. With power shifting to OPEC and even the reinvigorated Russian oil industry, he told me, "we're going to have to either conform politically and reduce our position as a great power or find ways around the problem." Solutions? Switching to coal and other fuels, plus conservation remain the best bets. "We will remake America in another image," he said. "President Carter will come back. He'll be 101 years old, but he'll be standing there in all of his glory, wearing a sweater." Charley Maxwell is a lion, with a full view of winter.