Seventy Five before Fifty Five

T. Boone Pickens was on CNBC's SquawkBox yesterday morning talking with Becky Quick and Carl Quintanilla. Becky and Carl didn't get a single answer they were looking for, no matter how many times they asked.

Becky Quick: I take it your still long on oil. Do you still think that oil prices are headed higher?

T. Boone Pickens: If you look at the inventory for the last... we've gone down in inventory for seven straight weeks on global supply and the market is very tight. At the same time you have the Iranian situation. Go back to January - I think that's the last time we talked. My collar was a little tight. If you remember we were right on 50 and I still said 70 before 50 and we had an inter-day price of 49.90 and it went on up 14 points after that. I still believe the markets will move on up for a while. I think we're getting ready to look at $70 oil pretty quick.

Quick: You know that's probably not a far off call given that right now we're above $64, but how much of this is based on fundamentals and how much it comes from the situation in Iran and the threat of more supply disruptions.

Pickens: You say that Iran is causing problems for us but at the same time you have inventory being pulled down, so it doesn't look to me like there's great pressure to get oil back into inventory. When I think about that for a minute, I don't think the oil is available, so I'm going to stick with 90 percent fundamentals, 10 percent geopolitical.

Quick: We really didn't see this big jump until Tuesday when we first heard about this extended threat - that's when we heard rumors that were sending the price up five bucks within about seven or eight minutes. If you take Iran out of this, do you think the markets would look at it the same way.

Pickens: Again, I think the fundamentals are in play. When you saw that big jump, I think that showed you that people are very nervous and especially if they're in a position where they're not hedged or they're actually playing the market short because that run-up was very, very fast.

Quick: Although Boone a lot of the stuff that has been driving crude oil prices, at least over the last six or seven weeks, had been because of the gasoline inventory. We've seen a big drop there because of the refineries that were unexpectedly shut down... We've had a lot of guests that have come on this program and said gasoline spikes traditionally right around Memorial Day but maybe this year we're getting it earlier and you're not going to be paying as much for gasoline after Memorial Day. Do you agree with that?

Pickens: No. I think the gasoline market will stay tight. We've had turnarounds - some of these refineries have been down longer than we expected. That's not unusual, but one thing you might look at is this infrastructure is old, it's old.
...
Carl Quintanilla: Do you think the Saudis here have an opportunity or does OPEC at large have an opportunity to open the spigot if things get too tight this summer.

Pickens: Well, Carl, I think the spigots are open. The oil that is available is the undesirable, high sulfur, low gravity crude and you don't have any crude that everybody wants - it's what they have to take when it gets so tight. I'm going to stick with 85 million barrels a day is all the world can produce.

Quintanilla: So you don't think the Sauds are going to roll in like a white knight, they're not going to be heroes. Nothing like that?

Pickens: No I don't think that. I think they're struggling with declining old production, trying to put on new production and drill some infill wells and get the production... I think all they can do is keep it about where it is.
...
Quick: Where are oil prices going?

Pickens: I'm ready for you - 75 before 55.

Becky and Carl, along with most of the mainstream media, probably think that the high oil prices of the last couple years were some sort of an anomaly that is not soon to be repeated.

If history is a guide, a global economy predicated on the free flow of cheap oil doesn't respond well to high prices, yet, that is exactly what is needed if larger, far more disastrous economic consequences are to be prevented.

The reason?

Well, the GAO (General Accountability Office) seems to have put their finger on it in this new study(.pdf) with the longish subtitle released yesterday:

CRUDE OIL
Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production

Addressing a future decline in oil production is difficult if not impossible when prices are not high. Where's the urgency if there are white knights like Saudi Arabia to solve any present or future supply problem, real or imagined?

Here are a few highlights from the report which sounds frighteningly like just about any other report assessing government preparedness for emergencies:

Most studies estimate that oil production will peak sometime between now and 2040, although many of these projections cover a wide range of time, including two studies for which the range extends into the next century. The timing of the peak depends on multiple, uncertain factors that will influence how quickly the remaining oil is used, including the amount of oil still in the ground, how much of the remaining oil can be ultimately produced, and future oil demand. The amount of oil remaining in the ground is highly uncertain, in part because the Organization of Petroleum Exporting Countries (OPEC) controls most of the estimated world oil reserves, but its estimates of reserves are not verified by independent auditors.
...
Federal agency efforts that could reduce uncertainty about the timing of peak oil production or mitigate its consequences are spread across multiple agencies and generally are not focused explicitly on peak oil.
...
While the consequences of a peak would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable. Therefore, to better prepare the United States for a peak and decline in oil production, we are recommending that the Secretary of Energy take the lead, in coordination with other relevant federal agencies, to establish a peak oil strategy. Such a strategy should include efforts to reduce uncertainty about the timing of a peak in oil production and provide timely advice to Congress about cost-effective measures to mitigate the potential consequences of a peak.

Well, that's a start.

Here's a clip of Matt Simmons on CNBC yesterday with more on the GAO study (link courtesy of The Oil Drum where there is much more on the subject here and here).