The Coming Bust in the Oil Market

There are some provocative, contrarian comments on oil prices from Charles Gave in the current issue of John Mauldin’s always thought-provoking “Outside the Box” investment newsletter:

The differences today compared to a year ago are that:
  • Oil prices started rising above their long term trend nearly three years ago.
  • The substitution effect should thus soon start kicking in.
  • The ‘oil as a weapon’ really started to come into force in the past 18 months.
  • According to OECD leading indicators, global growth is no longer in an ascending phase

For all of the above reasons, we continue to believe that the structural decline of oil will happen sometime in the coming quarters. After the 1970s/early 1980s boom and bust, it took twenty-five years for oil to recapture its previous highs.

Once the coming bust gets underway, oil may never recapture the highs it makes (made?) in the current cycle, if for no other reason that, twenty years ago, there was no credible alternative for short-haul transportation, heating, air conditioning, etc… (Remember Chernobyl, Three Mile Island…). Today, and even more tomorrow, credible alternatives will be in place.


  1. two words.

  2. Technology will save the day for major industrialized countries that have to import oil (eg. US, Europe, Japan, China, India etc.). There will be a massive transition to alternative fuels in these countries over the next generation.
    One area that Gave does not cover is managing Climate Change as this is going to be a significant driver to move away from fossil fuels. California will be signing a bill to curb greenhouses gases this week. California has also filed a law suit against auto manufacturers for producing greenhouse gases and damaging the environment. Other states and countries will follow behind.
    Regulation and the threat of litigation will force auto manufacturers and all other companies producing greenhouse gases on the defensive and to deliver clean solutions. Look at what happened to cigarette manufacturers.
    Technology and the entreprenurial spirit and dollops of capital will win the day. These clean energy solutions can then also be exported. Imagine a situation where instead of importing at great expense oil from unsavoury countries we can instead sell them clean energy solutions. Way to go!

  3. Two other factors are the discoveries of massive reserves in the Caribbean (which had long be theorized about, but not confirmed), the increased viability of tar sands and oil shale–in other words, even if we have experienced peak oil (which is highly dubious), the downside of the production curve isn’t as steep as the pessimists had predicted.

  4. But until that day, the sky scrapers in these un-savoury countries will be getting taller and taller. We will help them build it – directly and indirectly?

  5. Warren Buffett says:

    Don’t forget that many Saudi Oil fields have not been audited and that there has been minimal drilling in that region. It will be interesting to see how the Peak Oil camp will hold up over the next 2-3 Years. As for 2 words China and India, I’m sure the Chinese want to be dependent on no one except themselves, therefore they have a huge reason to pursue alternatives. Strategically, it makes sense for China and India to not be a the mercy of Oil dictators.

  6. Quote
    “Strategically, it makes sense for China and India to not be a the mercy of Oil dictators.”
    “Warren Buffett”
    I think this line of reasoning is wrong. Dictators can be very adaptable and will go where they see their best interest lies. Esstentually the US has gained quite a negative image in the “oil dictator’s” populace eye recently. Many oil dictators could very well flock to the protection of emerging powers like India and China for security arrangements in order to secure their own power base.

  7. Albert Pujols says:

    No one has mentioned the fact that OPEC will cut oil production to keep oil above $60. We won’t see $55 oil ever again.

  8. Brian Hunter says:

    We won’t see $4.50 natural gas ever, either. Not on my watch. I mean, it’s been since, like, 2004 since prices were that low.
    In fact, I think I’ll go bet my $9b hedge fund on it.

  9. Nick Maounis says:

    Brian, good to see you posting. Too bad what you did to my hedge fund, but not to worry, I shorted the other side of your trades with the other half of the hedge fund. So basically all of our investors monies flowed straight into my off-shore account. Sweet!