posted on January 28, 2006 04:41:30 AM new
Ready for $262/barrel oil?
Two of the world's most successful investors say oil will be in short supply in the coming months.
By Nelson Schwartz, FORTUNE senior writer
January 27, 2006: 4:40 PM EST
DAVOS, Switzerland (FORTUNE) - Be afraid. Be very afraid.
That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.
The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England -- and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says.
"U.S. power and influence has declined precipitously because of Iraq and the war on terror and that creates an incentive for anyone who wants to make trouble to go ahead and make it." As an example, Soros pointed to the regime in Iran, which is heading towards a confrontation with the West over its nuclear power program and doesn't show any signs of compromising. "Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided," he says.
Another emboldened troublemaker is Russian president Vladimir Putin, Soros said, citing Putin's recent decision to briefly shut the supply of natural gas to Ukraine. The only bit of optimism Soros could offer was that the next 12 months would be most dangerous in terms of any price shocks, because beginning in 2007 he predicts new oil supplies will come online.
Hermitage's Bill Browder doesn't yet have the stature of George Soros. But his $4 billion Moscow-based Hermitage fund rose 81.5 percent last year and is up a whopping 1780 percent since its inception a decade ago. A veteran of Salomon Bros. and Boston Consulting Group, the 41-year old Browder has been especially successful because of his contrarian take; for example, he continued to invest in Russia when others fled following the Kremlin's assault on Yukos.
Doomsdays 1 through 6
To come up with some likely scenarios in the event of an international crisis, his team performed what's known as a regression analysis, extrapolating the numbers from past oil shocks and then using them to calculate what might happen when the supply from an oil-producing country was cut off in six different situations. The fall of the House of Saud seems the most far-fetched of the six possibilities, and it's the one that generates that $262 a barrel.
More realistic -- and therefore more chilling -- would be the scenario where Iran declares an oil embargo a la OPEC in 1973, which Browder thinks could cause oil to double to $131 a barrel. Other outcomes include an embargo by Venezuelan strongman Hugo Chavez ($111 a barrel), civil war in Nigeria ($98 a barrel), unrest and violence in Algeria ($79 a barrel) and major attacks on infrastructure by the insurgency in Iraq ($88 a barrel).
Regressions analysis may be mathematical but it's an art, not a science. And some of these scenarios are quite dubious, like Venezuela shutting the spigot.
Energy chiefs at the World Economic Forum in Davos downplayed the likelihood of a serious oil shortage. In a statement Friday, Shell's CEO Jeroen Van der Veer declared, "There is no reason for pessimism." OPEC Acting Secretary General Mohammed Barkindo said "OPEC will step in at any time there is a shortage in the market." But then no one in the industry, including Van der Veer, foresaw an extended run of $65 oil -- or even $55 oil -- like we've been having.
It's clear that there is very, very little wiggle room, and that most consumers, including those in the United States, have acceded so far to the new reality of $60 or even $70 oil. And as Soros points out, the White House has its hands full in Iraq and elsewhere.
Although there are long-term answers like ethanol, what's needed is a crash conservation effort in the United States. This doesn't have to be command-and-control style. Moral suasion counts for a lot, and if the president suggested staying home with family every other Sunday or otherwise cutting back on unnecessary drives, he could please the family values crowd while also changing the psychology of the oil market by showing that the U.S. government is serious about easing any potential bottlenecks.
Similarly, he could finally get the government to tighten fuel-efficiency standards and encourage both Detroit and drivers to end decades of steadily increasing gas consumption. These kinds of steps would create a little headroom until new supplies do become available or threats like Iran's current leadership or the Iraqi insurgency fade.
It's been done it before. For all the cracks about Jimmy Carter in a cardigan and his malaise speech, America did reduce its use of oil following the price shocks of the 1970s, and laid the groundwork for low energy prices in the 1980s and 1990s. But it would require spending political capital, and offending traditional White House allies, and that's something this president doesn't seem to want to do.
posted on January 28, 2006 05:52:35 AM new
Goerge Soros just said we are dancing on the Titanic,now,who needs $262 barrel of oil when we are down under?
/ lets all stop whining !! /
posted on January 28, 2006 06:32:47 AM new
If trouble increases in the oil producing countries. If U.S. foreign keeps going no where with out much success. Yes, the U.S. will see higher oil prices and as a matter of fact we already are seeing higher prices.
BTW, if you heat with Natural Gas have you looked at your bill? In Pa. we are having a mild winter but the heat bills has doubled for many people.
Its not only people like Bill Browder and George Soros that think Oil will and is going higher. Millions are putting their money in Gold. These people feel Gold is a better and safer bet than stocks right now.
posted on January 29, 2006 09:22:09 AM new
Where have all of you been? You've figured out that "war" can be economic as well as military. Pretty soon you'll figure out that "da oil" is a much bigger weapon than blowing up a bunch of moored battleships.
Even the French, who vow to fight until the last drop of OUR blood are rattling sabers.
Write this down:
Prediction: Within a year, Iran will cease to exist in it's present form. You do not threaten the Israeli's with extermination and use nuclear blackmail on the western powers and live too long.
Coming soon: A major confrontation between the Japanese and Chinese for Southeast asian oil.
posted on January 29, 2006 11:25:02 AM new
You should read the articles in the German papers.
1 week the head of the CIA visits Turkey, the next the Head of the CIA, then Rice, then a bunch of Generals.
The word is that they are negotiating for Turkish cooperation, which was denied in the Iraq move. Turkey wants to hit the Kurdish rebel bases across the border when Nato hits Iran. The Germans have questioned one of their reporters on this who has previously leaked sensitive info (all of which was true).
posted on January 29, 2006 11:44:22 AM new
I'm not so sure nerfball, dasquirrel may have a point or two...doesn't mean I want it to happen, but I could envision it pretty easily, given this President's history, and the fact that his numbers can't go much lower...he has very little to lose.
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posted on January 29, 2006 01:17:02 PM new
I see the US is defering Iran to the UN and now we are getting lambasted by some in the media as giving up our leadership of the world role?
I do wish people would make up thier minds.
With Russia attempting to diffuse the issue in Iran, I think they will be given the go ahead and it will quiet down. Now if Iran were to make more overt comments against Isreal after they have their enriched uranium, then the real trouble could start.
Ron
"I'm so depressed. My doctor refused to write me a
prescription for Viagra. He said it would be like putting
a new flagpole on a condemned building."
posted on January 29, 2006 01:33:30 PM new"With Russia attempting to diffuse the issue in Iran, I think they will be given the go ahead and it will quiet down. Now if Iran were to make more overt comments against Isreal after they have their enriched uranium, then the real trouble could start."
posted on January 30, 2006 07:57:04 AM new
Russia is doing nothing to defuse anything. They are supporting Iran. Russia is commodity rich and Putin wants to return to the old empire. He's playing to damage world economies and be insulated from the fallout.
posted on January 30, 2006 09:14:50 AM new
I don't think so desquirrel, Putin may be someone to watch, but Russia is still a member of the UN and knows that it would be better to assist Iran in nuclear power for energy than to have UN sanctions.
Ron
"I'm so depressed. My doctor refused to write me a
prescription for Viagra. He said it would be like putting
a new flagpole on a condemned building."
