60 Minutes on Oil...Did Anyone Actually Do Any Checking? $$

11 Jan 8:42am
Posted by ToddSullivan
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So, 60 minutes did a piece on oil last night and, well, oops..

Wall St. Newsletters


First here is the piece.


For those who do not want to watch it here are the crib notes. A Wall St. cabal controls oil markets that Enron set up to manipulate prices. There is a little more but not much...

Let's look at some of the claims...


Production: Here is the EIA world oil production chart:


For those who want it, here is the link

One thing you'll notice, production, unlike the claims of the piece, did indeed fall. In fact, as price rose during 2007, both US, Persian gulf and worldwide oil production was below 2006 levels. As the super spike began in 2008, the Pershing Gulf region increased production roughly 10% to capture the high prices. What is alarming is that US production again fell (could not capture high prices) and worldwide production gained only 6%.

Let's look at demand: (million of barrel per day world demand)
2004 - 82.41
2005 - 83.82
2006 - 84.95
2007
Q1- 85.84
Q2- 84.88
Q3- 85.54
Q4- 86.94
2008
Q1- 86.07
Q2- 85.27

Again, here is the link

So, despite what the 60 Minutes piece said, world demand for oil waned only slightly during the spike period and production was only then ramping up. Let's not forget, in Q2 2007 demand fell only to accelerate again to record highs 6 months later.

What happened after? Demand destruction. The global recession we are entering eviscerated demand and with the recent increase in production, the price that peaked in July 2007, collapsed. The problem is production has also, but that is a story for the next oil spike.

What did the EIA say in June 2008?


Here is how the EIA modeled oil prices based on "fundamentals", again in June 2008.




Now, was oil priced correctly at $147 a barrel in July 2008? No. There was some speculative excess but to suggest that what happen in 2007-2008 was "speculators" lacks in any basis of fact. Is oil priced correctly at $40 a barrel today? No. Far too low. Good, I'm buying...

For 60 Minutes to imply that supply /demand had very little to do with the oil price increases in 2007 and early 2008 is counter to what the EIA was saying. It does make a nice little story to blame it all the villain of the day, Wall St. and to bring back to ghost or Enron, but it is still shoddy work on their part. Now, it isn't as bad as forging documents to try to steal a Presidential Election, but is is just as dishonest..

Here is the most recent outlook from the EIA (12/9/2008)


Disclosure ("none" means no position):Long oil through DXO, DBO
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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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