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35 comments on Jim Cramer: "The Simmons Argument is Right..."

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Southsider1 on September 9, 2005 - 10:17pm Permalink | Subthread | Parent | Comments top
Wall Street does in fact accept peak oil. I had lunch the other day with a retired hedge fund manager. He was quite conversant with most of the key themes discussed here on TOD, and accepted peak oil as obviously true. When I expressed surprise, since what the public hears from Wall Street is largely bland cornucopian reassurances, he reminded me that everything Wall Street generates for public consumption is marketing of one kind or another. The pros keep their real opinions to themselves.

When I asked why we are not seeing a move toward long-term investments anticipating the peak, he remined me that there are no long-term invesments on Wall Street. Professional traders are interested in making money next week, not next year, and the peak is not yet upon us.

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Halfin on September 10, 2005 - 12:06am Permalink | Subthread | Parent | Comments top

When I asked why we are not seeing a move toward long-term investments anticipating the peak, he remined me that there are no long-term invesments on Wall Street. Professional traders are interested in making money next week, not next year, and the peak is not yet upon us.

That argument doesn't really hold up. Long term investments do exist and if you believe in peak oil, buying a 2010 contract for $60 would be a sure path to riches. Granted it's five years out, but who would pass up a sure thing like that? Which would you rather do, have a million dollars in five years as essentially a sure thing, or else struggle to outwit every other trader in guessing what will happen in oil in the next week, the next day or the next hour? People just don't leave money on the table in the real world. They don't say yeah, I could make millions off that, but I really don't feel like it today.

And the fact is, trades do occur in these multi-year contracts. There aren't as many as in the near-term markets, but they happen. Somebody is buying and selling out there. Prices are being set, trades are being made. If the consensus among those traders was for a Simmons style peak oil scenario, they wouldn't be setting a price of 60 bucks. It would be up over a hundred, maybe two hundred.

Another point is that even just looking at today's prices, if all the pros believed that oil was going to be worth $100 or $200 in a few years, they wouldn't be selling at 65 today. Again, that's leaving money on the table. They would demand a higher price today. And you know what? They'd get it! Why wouldn't someone buy oil at $80 today, if he knew the fundamentals were driving it up to double that?

The only explanation that makes sense is that traders don't see this as anything like a sure thing. They see a real risk that oil could move down over the next few years. After all, there are plenty of experts who say that it will do just that, Yergin and Lynch and the U.S. DOE. You can find experts on both sides. Any sensible trader will hedge his bets and not put it all on a Peak Oil scenario, at least not without realizing that he's taking a big chance in the hope of a big reward.

Maybe your fund manager is a Peak Oil believer, but I'll bet if you pressed him he'd admit that it's not a sure thing, that it would be a big risk to bet heavily on a Peak Oil scenario, because one thing you learn in the markets is that there are no sure things. No matter how good something looks you can always be surprised. If your hedge fund guy has the kind of experience you say, I'm sure he's learned that lesson, and learned it good.

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mw on September 10, 2005 - 6:15am Permalink | Subthread | Parent | Comments top
Even the smartest investment folks can't pin Peak Oil to a day, year or decade. At present, the street senses a number of years of tight supply against rising demand. Some believe peak oil may be around the corner; I'm willing to wager a nickel that many if not most are still hedging their bets.

There are many more optimists than pessimists in the investment game. Even among professionals, those that only know how to buy outnumber those that know how to sell.

After all, there aren't many/any big producers saying "sell our stock, it will be worth less soon". When was the last time you read an explicit admission like this: "in 2010 (or 2011 in March) we will no longer, forever, be able to increase our reserves and by 2012 in May our production will start to decrease by % a year".

No, most of the bigger producers are aiming for reserve and production per share growth. Some of the income trusts which exist solely to exploit relatively short-lived reserves are the exception.

So you've got a culture that is geared towards rewarding companies that can keep on delivering and in this case that means finding and producing more. Not until its really obvious that there's an industry-wide lack of such companies, and that no new tech or unconventional sources are coming to the rescue, will you really see long-dated futures rise.

I'm thinking that when peak oil is an obvious reality, governments around the world will ban futures speculation, depending on how fast/bad the situation is. The rise in the price of oil is nothing so far compared to what could happen at a time when it becomes clear there will be much less available to markets every year.

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35 comments on Jim Cramer: "The Simmons Argument is Right..."

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