April 21, 2008 11:38AM
Madonna Ain’t Worth $167,000 per Minute; Or, I’m Calling A Top In Oil
By Cody Willard
I’ve long been a bear on oil and energy as an investment thesis — Simply put, the end product of all energy is totally commoditized and every player in the business is totally beholden to the vagaries of the market to set the price of that end product.
Intel gets to choose how much to price their processors for. And they’ve kept gross margins far above 50, 60% regardless of the cycles playing out in the broader economy. I like to invest in businesses that have lots of defend-able proprietary technologies and/or strategies in their business model. Google’s another great example of that kind of a business.
But oil? The same cycle we’re playing out right now in 2008 is part of the exact same 150 year old cycle that has been playing out since people figured out that fossil oils give a great bang of energy in a relatively small package (gasoline vs cottonwood, for example…both burn very easily, but only one burns clean and hot enough to say, run a Cadillac). Peak oil? Yeah, I heard that same silly concept back in the last oil bubble that I lived through in Ruidoso, NM, a very-oil-dependent tourist economy near Texas. All those idiot Texans who spent like oil would stay at $35 a barrel and higher forever, ended up totally broke and ruined when oil, as it ALWAYS does, reversed its intermediate-term trend and headed back to $10. They were broke for a couple decades after that. And oil was still at $10 a barrel just ten short years ago. Yeah, 1998.
Oil’s up 1100% percent since bottoming in 1998. If you think it’ll be up another 1100% in the next ten years, then by all means, stick with your energy trade. But if you think the last 150 years of oil cycles — and the historical boom/bust cycles of all commodities — are actually meaningful because it’s not actually any “different this time”, then you gotta be looking for some top indicators. My gut’s telling me we’re in blow off top mode right now and that oil will see an $80 handle before a $140 handle, but I never trade off my “gut” and neither should anybody else.
Better top indicators are the endless money managers constantly being trot out in front of viewers, listeners, and readers of the mainstream media, all of whom are now certified oil cycle and technology experts, and KNOW FOR SURE that peak oil’s FOR REAL! As our competing TV station put it today, “There Will Be Higher Oil Prices”. That was across the lower third of their screen for an entire interview with some dude who says that there’s $30-40 of speculative premium in oil but that $140, $150 are the next stop anyway. He even said outloud after explaining his logic of higher prices, “It doesn’t make sense for prices to go higher…but they will!”
That’s call complacency. And it’s sorta rare to get that clean an example of it. Okay, not that rare, because the mainstream media always glorifies trends at the top.
Here’s another top indicator, if true.
Material girl Madge is reportedly getting paid around $25 million — roughly $15 million for a 90 minute concert and another $10 million for a millionaire’s private party, both in Dubai. According to Gordon Smart of The Sun (UK).
Coincidentally, I’m actually good friends with her booking agent and have a call into him about this. Let you know if true…
Recall that last year Steve Schwartzman put the top on the Private Equity bubble (”No, really, leveraging up hundreds of billions of dollars for struggling retailers in a very tired year five of an economic boom is a GREAT INVESTMENT STRATEGY…uh, oops”) when he paid some dad (Rod Stewart) of that famous celebrity from VH1 a bunch of money to play at his birthday.
As an aside, take a look at the line up at that Private Equity Topper!
…After all, the titans who partied control more than $3 trillion a day. They included Lloyd Blankfein, head of Goldman Sachs; Jimmy Cayne, the chief of Bear Stearns; Merrill Lynch boss Stan O’Neal; JPMorgan Chase head Jamie Dimon; and investment-banking chief Jimmy Lee.
One last parting thought on that roster note — these guys told you the mortgage bubble didn’t exist and that even if it did, they wouldn’t be hurt by it. How many of those guys even have their jobs just a year of so later. You really wanna listen to the guys in OPEC and at Chevron for oil investment advice???
Comment by josh
Apr 21st, 2008 at 12:38 pm
If any entertainer is actually worth $167,000 a minute it would be Madonna, she works harder than say Oprah or Tiger Woods who get hundreds of millions to do nothing but host a talk show or for Gods sake swing a stick! Madonna works extremely hard touring , last I heard she pulls 18 hour days and tries very hard to make her fans happy by giving them what they are paying for and then she gives millions away every year with zero credit. I rather pay her to sweat on stage expending the energy of a 18 year old trying to prove why she is the real thing. I agree no one is worth millions of dollars but there are far more less deserving people to trash than Madonna who works hard for the money
Comment by Arraya
Apr 21st, 2008 at 12:50 pm
Methinks you should not write about peak oil anymore. Maybe you should looks at the production numbers a little closer. Supply and demand still applies.
Comment by Cody Willard
Apr 21st, 2008 at 1:23 pm
Yeah, the $167,000 per minute thing is for perspective at the outrageousness of the bubble - not a statement on Madonna…who I agree rocks as a businessperson.
Arraya, there’s a glut of supply coming and demand is being reigned in with new trends too…all gluts are followed by shortages are followed by gluts. This time ain’t diff, imho.
Comment by Aaron
Apr 21st, 2008 at 1:36 pm
I sincerly hope you are right this country needs for oil to come down I am so sorry for those who invest but that is their problem and while I agree with your advisary there supply and demand are still in motion however we are cresting up to a point where we can’t afford fuel as it is many many small businesses have already gone under so there has to be a point where we all just stop buying and stay at home if you still have a home
Comment by Scott
Apr 21st, 2008 at 2:19 pm
OPEC’s Growing Call on Itself
http://research.cibcwm.com/economic_public/download/occrept62.pdf
http://netoilexports.blogspot.com/
Dr Sadad Al-Husseini
Brown University PhD, former head of Saudi Armco’s production & exploration
November 1, 2007 interview
Page down to: Listen to the interview with Sadad al-Huseini.
http://www.davidstrahan.com/blog/?p=67
http://www.energybulletin.net/36510.html
In a revealing interview with journalist David Strahan at this year’s Oil & Money Conference, former head of Saudi Arabian exploration & production Sadad Al-Husseini told the world that he now believes that the current level of world oil production will likely never be exceeded.
Comment by Scott
Apr 21st, 2008 at 2:30 pm
What does 86 million barrels per day look like?
http://oildepletiondebate.blogspot.com/2008/02/at-1000-barrels-of-oil-per-second.html
At an equivolent of 2,044,000 Olympic swimming pools you could make single pool 63,488 miles long ever year…year after year and that assuming supply/demand doesn’t grow. CERA estimated the world production declines of 4.5% per year. At that rate of decline from existing wells (4 million per day) the oil industry must bring to market a new Iran every year just to keep production levels flat at 86 mil. CERA believes production to grow to 112 million within 9 years (2017). With overcoming the 4.5% annual decline rate what does the oil industry need to do to meet the 112 mil? Over the next 9 years it needs to bring to market 9 new Saudi Arabias - as reported by Neil King Jr, oil reporter for the Wall Street Journal. CERA believes the industry is doing that volume. We’ll see. The IEA, however, see an Oil Crunch after 2010 http://www.washingtonpost.com/wp-dyn/content/article/2007/07/09/AR2007070900432.html
Comment by Matthew Coyle
Apr 21st, 2008 at 3:03 pm
Peak oil has occurred in many countries already, including America in 1970. Global oil discoveries peaked in 1964. For the past few decades we have been using 5 barrels for every one discovered. You are trying to compare the oil commodities market of today to past market situations. However the situation today is unprecedented; if you don’t believe me read the following reports released by our government:
The Hirsch Report
The Government Accountability Office Peak Oil Report
Comment by Scott
Apr 21st, 2008 at 3:09 pm
Saudi to leave some oil finds for future
http://www.business24-7.ae/cs/article_show_mainh1_story.aspx?HeadlineID=5523
Saudi King Abdullah drops quiet bombshell; U.S. media sleep through it
http://www.aspo-usa.com/index.php?option=com_content&task=view&id=358&Itemid=91
Comment by Kate
Apr 21st, 2008 at 5:04 pm
Cody, this is off topic to your post, but I’d just like to know if you plan to continue publishing the daily guest list for Happy Hour now that you’ve moved your blog to foxbusiness. I TiVo your show, but I don’t always have time on any given day to watch the recording, so seeing who is going to be on the show each day is very helpful. Some guests are just more interesting than others, if you get my drift. Please continue to have Jay or Joan (are those your producers?) post the Happy Hour guest list here at The Cody Word. Thank you.
Comment by Jim
Apr 21st, 2008 at 6:19 pm
Wow! It’s like you don’t know anything at all about the oil business. Basing your investment decisions on a Madonna concert? Whaaaaat??? Get a haircut Cody. The last time I saw that hairstyle it was in a mile long gas line back in the seventies. On second thought you might as well look the part. Those gas lines are coming back ….permanent.
Comment by Steve Z
Apr 21st, 2008 at 11:10 pm
Understandably the laws of supply and demand are in effect. This, however, does not mean we should sit on the sidelines and hope China’s economy will slow down sometime soon (which it won’t) or OPEC will open their hearts and increase output (fat chance). Congress needs to devise some type of national initiative on the same scale, if not larger, as the space race of the 60’s in an effort to reduce foreign oil consumption. I support free trade, wholeheartedly, but there must be a point where we realize the market is not going to “correct itself” and affirmative steps must be taken to reduce foreign oil consumption.
I propose we open the frozen, useless tundras of Alaska, and get oil down to $60/barrel like the good old days way back in 2006. Eventually we will figure out how to power our cars with tap water or sunlight (or something cheap and plentiful) and the caribou and penguins can have their frozen, useless tundra back.
Keep in mind our economy is being pushed to the brink of a major recession, while the likes of Iran, Venezuela, Russia, and Saudi Arabia are swimming in oil money. What’s worse is that many of these countries are anti-American and anti-democratic. Iran’s President threatens America and her allies on a weekly basis, yet we continue to strengthen Iran’s economy. The balance of power is tipping away from America and it has EVERYTHING to do with oil (see war in Iraq).
We can’t simply stop buying oil from Iran, Venezuela, the Saudis, etc and expect oil to stay under $300/barrel. America needs to invest in a new energy source ASAP, else, for a lack of a better term, our enemies will have us “over a barrel.”
Comment by Ryan
Apr 22nd, 2008 at 12:04 am
Go Cody! The comments that you are getting from these people completely vindicate you.
The “peak oil” experts have been predicting the downfall of oil every year for the past 25. Their gurus have about as much credibility forecasting as a 5th grader.
I think the more compelling element of this would be the massive flow of money into commodities via pension funds, investment banks and ETFs in search of high returns. For instance, ETFs now control nearly 20% of the world’s gold. Every single commodity is going nuts (if you think oil is bad…go look at wheat, corn, or soybeans) and every day I see a new investment “opportunity” in commodities everywhere I go (radio, tv, newspapers, etc.).
However, The most telling element of this dynamic is demonstrated in the fact that nobody can separate the effects of inflows of money into these markets from the fundamentals.
The shakiest assumption of the oil bubble is that India and China are going to grow to the sky. India’s oil consumption been relatively flat over the past 3 years (look at the EIA data, not what the “peak oil” advocates/the whack-jobs say) and China’s stock market has crashed nearly 50% in 6 months. Do you think those things will have an impact on price?
Real estate developers used demographic projections of 20-25+ years to demonstrate infinite demand for new housing units as a way of propping up the bubble. I see nothing different here.
Comment by Blake
Apr 22nd, 2008 at 9:36 am
Interesting AP article here.
Money quote:”This is not anything new and it will not help ease oil prices,” said Ehsan ul-Haq, head of research at JBC Energy in Vienna, Austria. “The oil futures market is very strong, but the physical markets are not so strong.”
It’s a price bubble. Remember what happened a couple of years ago. At first, a few articles came out, warning we had a housing bubble. They were ignored. Now, houses in the area where I live that were easily selling for $300,000 are sitting for months at under $200,000.
What makes you think oil is any different? Oil has a history of boom and bust and anyone who ignores that cycle does so at their own peril.
Comment by Blake
Apr 22nd, 2008 at 9:51 am
I should have highlighted where Ehsan ul-Haq mentioned how strong the futures market is, but physical demand isn’t.
So, what happens if the price is bid out of sight but there is no longer any demand at that price?
Comment by Scott
Apr 22nd, 2008 at 12:41 pm
I am an oil and gas producer so I’ve felt boom and bust oil cycles and because I’ve brought wells in personnally I watched all of (and I mean every one of them) go through a decline curve in production. Aggregate world oil decline is going to happen for the whole world and net oil exports will decline faster if oil producing countries want their economies’ GDPs to grow or if the simply want to hoard, I mean husband, their reserves
Comment by Scott
Apr 22nd, 2008 at 3:36 pm
“The Sirens Shrill”
The International Energy Agency (IEA) gives alarm: The world could run out of oil faster than expected - the danger of a supply shortage is rising
Hunger for energy vs. energy shortage: While the demand for oil is on the rise, the production is decreasing - shortages, escalating prices and inflation are looming. When talking to energy politician Astrid Schneider, Faith Biro, chief economist of the IEA demands a change in policy from the member countries. His motto: leave oil before it leaves us.
Interview follows: http://oildepletiondebate.blogspot.com/2008_04_01_archive.html
Comment by Cleary Squared
Apr 22nd, 2008 at 9:34 pm
Cody, I think in the next few months, we’ll see the markets calm down somewhat, and then much more as time passes.
It’s a lot like the Hot Christmas Toy Phenomenon: companies with said toy will hoard the items, creating buzz and an artificial shortage. Shoppers will be frenzied enough to pay for the Hot Toy at any price, including going on eBay to fork over hundreds of dollars. But once the kids get the toy and lose interest, those who put the hot toy on the market for $1,000 and still have it in their hands, unsold, won’t be able to get rid of it. The stores themselves will be overflowing with these Hot Christmas Toys by January, unloading them for much less than the retail price.
The same thing will happen to oil. This is the usual spring hysteria because of spring maintenance. I predict by around Memorial Day we’ll reach our peak, then go down a little until Labor Day, and then go down steeply from there. Also consider that this is an election cycle: OPEC is watching very carefully on who will be elected, and if they see a President they can do business with, they’ll flood the markets with millions of cubic meters of oil, thus crashing the prices down very quickly.
It’s scary now, but like the housing market, just be patient. The speculative bubble is coming soon.
Comment by Jim
Apr 23rd, 2008 at 6:31 am
@ Cleary Squared
Would you like to buy shares in my perpetual gold mine?