Energy Prices Just One Year Ago

During the spring of last year our country was awashed with cries from the business community regarding the stratospheric rise in oil and natural gas prices. Energy companies were reporting record profits, while energy service companies charged whatever they wanted for the use of their drill rigs and crews. Our nation was facing an important political year by choosing their party's candidate for the Executive Office. Just one year ago, while oil prices hovered well above $100 per barrel and natural gas prices were above $10 per Mcf, drilling rigs were in short supply. Motorists became accustomed to paying $3-4 per gallon for gasoline, and airlines scrambled to offer fewer services in order to lessen the weight of their planes. Could things really have changed so much in just one year? I believe the answer is… yes and no. My brother has been a student of investment markets for most of his adult life. I have learned a lot from him, especially about the psychology of financial sectors. "Remember that markets always climb higher and fall farther than you can ever expect," he has told me on many occasions. Good advice and so true. I have written articles about the famous stock market investor Bernard Baruch. He was a Wall Street maven living the high life during the roaring 1920s. As the story goes, one day he was stopped by a shoeshine boy of early adolescent age. Along with his shine, he got a piece of stock market advice from the young lad. "I hear GE is about to announce a big merger," he told Baruch. "I've put everything I've got into it," he said. Instead of running back to his office to buy more GE stock, Baruch interpreted his new stock tout's advancement from the boardroom to the shoeshine boy as a sign of impending market doom. He headed back to his office with a new sense of purpose: to sell all of his stock and get out at what he now believed to be the top of the market. "When the shoeshine boy is fully invested in the stock market, there is nobody left to support these high levels," said Baruch. Over the next six months, he divested himself of nearly all of his stock holdings. Soon thereafter, the series of stock market crashes, that actually lasted for over two years, took the equity markets beyond the point that anyone could have imagined. Some years later, sitting on his cash, Baruch bought all of his stocks back for pennies on the dollar. Great story, if it's true. Those of us in the energy industry, especially the securities business, have taken our hits across the chops these days along with everyone else, perhaps a bit worse. Warren Buffett is fond of saying that "when the sea recedes, the fish are exposed." In this same way, we have seen many in our industry turn their back on energy development that they so righteously embraced just a year ago. Ironically, in our modern, weird, topsy-turvy markets, all of this craziness may end up being the very best thing for energy investors worldwide. Students of market psychology tell us that markets begin to rise at the point where everyone is convinced that they will continue to fall. Conversely, markets fall when everyone is convinced that they will continue to rise. This is the basis for a fairly obscure theory of economics called contrarian investing. In fact, it may be one of the few legitimate ways that lasting fortunes can be created. So why doesn't everyone become a contrarian investor? Because it takes courage and intellectual determination to move forward with your investment plans in the face of industry adversity. In my opinion, the future successful investors, those that might appear on the covers of financial magazines as investment heroes, will be those who are able to follow their conviction and beliefs with courage, square in the face of adversity and uncertainty. As a peak energy advocate for many years now, I view the true fundamentals of energy development a bit differently than most. For me, the belief in the power and value of energy is more than just a passing fancy. It's important to note that the fundamentals of our knowledge of worldwide future energy demands and supporting energy development has not changed at all over the last year. Worldwide energy demand has only dropped around 5% since last spring. This is actually a very small reduction, especially when compared to the expert predictions of dramatic increases in future energy demands. Yet our perception of this field somehow has reduced.Consider these recent facts: 1. According to a number of natural gas experts, when gas prices dip below $3.50 per Mcf, some of the largest gas developments in North America (Barnett Shale, et. al.) must "shut-in" their wells. We are now getting reports of large development properties beginning to stop their flow of gas production because their development costs exceed their energy revenue. Once this occurs, the cycle of supply and demand begins to slide the other way. In essence, the market has already discounted the natural gas supply glut that originally caused the price to drop. 2. We are in unprecedented markets. An example is the fourth quarter of 2008, when, for the first time in a decade, natural gas prices fell during the last three months of the year. 3. A recent article by natural gas analyst Jeff Clark (Natural Gas is Ready to Rally) offered an excellent chart detailing the ratio between oil and natural gas. The current 15-to-1 ratio (oil to gas) is the most extreme divergence of the past 20 years. Mr. Clark states that this means one of two things has to be true: either oil is too expensive or natural gas is too cheap.4. On April 26, OPEC announced that it wishes to move the energy markets until oil reaches a minimum of $70 per barrel. OPEC has forecast a continuing reduction in production until the balance between supply and demand reaches this price point, which they consider to be "the minimum acceptable level." According to OPEC Secretary General Abdalla El Badri, "the price of $50 per barrel is not enough to cover our current and future investment costs."5. With normal ratios of about 12-to-1 (oil to gas), $70 per barrel oil would lead to a yearly gas average of around $6 per Mcf. 6. On Thursday, April 30, the Wall Street Journal released a front-page article entitled "U.S. Gas Fields Go From Bust to Boom." This comprehensive piece, written by Ben Casselman, details that natural gas appears to be entering the center of a perfect storm as our nation's plentiful coal reserves are falling into disrepute with the current Administration. Additionally, a recent climate/change bill being pushed by the federal government is expected to boost reliance on natural gas due to the fact that so-called "green" alternatives are not expected to provide substantial benefits to the nation for many years. Adding fuel to this fire is the ever-increasing impact of peak oil on our national crude oil production, forcing us to rely upon foreign sources of oil to power our modes of transportation. Also, plans are under way within the energy department to consider ways to retrofit hundreds of thousands of service stations to offer natural gas.This major just-released news piece finally acknowledges publicly what many of us in the energy industry had been saying for a number of years: the expansion of natural gas is the clear alternative for our nation's future. This expansion will serve to maintain the benefits of hydrocarbons in a manner that is non-offensive to those concerned about the environment, as would an increase in coal use or our foreign dependence on crude oil reserves. Many of these oil-rich nations are fundamentally opposed to our way of life. Lastly, I believe we must consider our current economic malaise as a whole. How can our country, as well as the world, fight its way back to greater prosperity without a dramatic escalation in the use of hydrocarbons? Remember, we built this planet successfully from the Industrial Revolution until now based upon the tremendous productivity created by the use of oil and natural gas. One barrel of oil equals the productivity of one person working for 12,000 hours; that's nearly six years worth of a typical 40-hour work week or 500 days of solid work round-the-clock! How can we ever return our economy to its previous glory without expanding our use of the most productive substance ever discovered in human history? While it is true that a lot has changed over the past year, I do not believe any of those changes include the reduction of future uses or benefits of hydrocarbons. With most nation's populations continuing to explode, especially in Latin, Asian, Indian and African nations, I believe we will see a resurgence in the demand for energy supplies return with a vengeance… at about the same time that most people have forgotten them. Don't forget that investments in natural gas development are not made for a short-term gain. They are made with the long-term knowledge that increasing populations and reductions in the supply of energy would inevitably cause a supply and demand imbalance that could only result in the eventual increase in the cost of these precious resources. While investors in energy resources all enjoyed the recent historic highs, in my opinion the future will see prices that will dwarf the prices of last year. I suppose it is easy to believe this during times of lofty energy prices, but the contrarian investor is able to see this just as clearly after the rest of the world has fallen asleep.Mammoth Resource Partners--Dr. Roger L. Cory, President of Mammoth Resource Partners, Inc, has over 25 years experience in law, business consulting and investing. In law, he has served in various capacities including contractual development and negotiations for two prominent California law firms and a judicial clerkship for Presiding Circuit Court Judge Richard Byrne. He has served at the highest levels of industry directing national management consulting firms from Chicago to Lexington, Kentucky as Divisional Chief, Executive Vice-President and Chief Operating Officer. He has created and maintained worldwide partnerships through syndication in Limited Partnerships, Joint Ventures and registered offerings. Dr. Cory received a Bachelor of Arts-Journalism Degree from California State University at Fullerton and holds a Doctorate of Jurisprudence from Pepperdine University, School of Law. He was recently asked to serve as Honorary Chairman of the Business Advisory Council of the National Republican Congressional Committee.Source:

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