This article was published by The McAlvany Intelligence Advisor on Monday, February 1, 2016:
In 1894 the president of the Royal Society, William Thomson, First Baron Kelvin, predicted that the radio had no future. Today there are more than one billion of them tuned into more than 33,000 radio stations.
He also predicted that heavier-than-air flying machines wouldn’t work. In addition he said that “X-rays will prove to be a hoax.”
Scientist Dionysius Lardner predicted in the 1850s that “rail travel at high speed is not possible because passengers would die of asphyxia” and that building a steamship to take passengers from New York to Liverpool would be impossible: “They might as well talk of making the voyage from New York to the moon … 2,080 miles is the longest run that a steamer could [manage] – at the end of that distance she would require a relay of coals.”
In 1927 H.M. Warner, of Warner Brothers, asked, “Who … wants to hear actors talk?” In 1936 Radio Times editor Rex Lambert thought that “television won’t matter in your lifetime, or mine.”
And so, when energy trader John Kilduff was interviewed on CNBC’s “Squawk Box” on January 4, the day after Saudi Arabia executed a Shiite cleric for crimes against the state (thus greatly offending the Shiite majority in Iran), he predicted that oil prices would drop, not rise. Furthermore he had the audacity to predict they would drop to $18 a barrel.
On cue the price of West Texas Intermediate (WTI), then trading at $36.76, started dropping. It continued to drop in nearly a straight line, hitting $26.55 on January 20.
When WTI popped back up to $33.63 on Friday, January 29, CNBC invited Kilduff back to see if he had changed his mind. He hadn’t:
This whole story line about there being a coordinated production cut plan [between Iran and Saudi Arabia] is just rubbish. We’re going to get that low [$18]….
I don’t know why there’s such negativity in the stock market around this low oil price because it’s so great [for the economy]. I filled up my tank for $25 yesterday. This is nothing but stimulative and positive for the economy.
Kilduff is no genius but a careful student of current events. His prediction is likely to be spot on.
First of all, there is no love lost between Saudi Arabia and Iran, which is just one of the reasons a “coordinated production cut” isn’t going to happen. Both members of OPEC need every dollop of oil they can sell to keep their welfare states and military adventures well-funded. The Saudis remain adamant in their determination to keep their market share from moving elsewhere while hoping against diminishing hope that production in the United States will start dropping. It’s a waiting game the Saudis are losing.
At present there are between 500,000 and a million barrels a day of excess production filling up storage tanks on land and tankers at sea. Another 500,000 from Iran are just going to drive prices lower.
Russia, a non-OPEC member, is in the same boat: running deficits but continuing to pump at close to maximum.
Another problem for OPEC is that the breakeven point for American frackers is well below those of conventional producers, so they can continue to produce at a profit even at these low prices. And any rigs they have stacked can be brought back online rapidly and inexpensively when oil does find a bottom and begin to move higher. This effectively puts a ceiling on the price of oil, far below what the Saudis and other members of the cartel need to pay their bills.
Still another is the economic slowdown in China and in Europe. Some have suggested that China’s manipulated economic output numbers are very far off the mark, that China’s growth isn’t at 6 percent plus annually but may actually have gone negative.
More efficient automobiles and pickup trucks in the U.S. are adding to the downward pressure directly, as well as the drop in diesel and natural gas. Lower diesel costs are being translated into lower transportation costs for over-the-road trucking companies, while lower natural gas prices are continuing to drive the move of power plants away from expensive and dirty coal to cheaper and cleaner natural gas.
There are other pressures on oil as well, such as the projects in the Gulf of Mexico that are just now coming online. There are vulture capital funds waiting to revive bankrupt oil producers. In those cases the oil reserves remain in place, just the ownership will have changed.
All of which, happy to say, is having an increasingly negative impact on OPEC. Kidruff said it well: “OPEC … as we know it is over because these two [countries – Saudi Arabia and Iran] are not going to be coming together anytime soon on modifying or moderating production.”
Lower oil prices are also making environmentalists’ demands that carbon-based resources must stay in the ground “where they belong” appear increasingly silly. After all, lower prices are moving power plants to natural gas, which is cheaper and cleaner. Isn’t that what they’ve said they want? Well, they’ve got it.
If Kilduff is right, and oil doesn’t find a bottom until below $20 a barrel, the world is going to look a lot different, and better. OPEC’s influence will have waned if not disappeared altogether, environmentalists will be on the endangered species list, consumers will enjoy higher standards of living, and … get this, all without government prodding or incentives.
Louis Armstrong will be proven right:
I see trees of green,
Red roses too.
I see them bloom,
For me and you.
And I think to myself,
What a wonderful world.
CNBC: Oil may fall to $18 amid Saudi-Iran tensions: Kilduff
CNBC: Don’t believe oil bump, $18 still coming: Kilduff
New York Times: Saudi Arabia Cuts Ties With Iran Amid Fallout From Cleric’s Execution
Graph of WTI – one month chart
Predictions that missed the mark