It's been years since oil peaked at $100, and while prices have rebounded from the lows, they're still pretty far from those highs.

In this week's Industry Focus: Energy podcast, Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman dive into five factors that could theoretically lead to oil popping back up to $100 a barrel in the next few years. Find out how likely it is that things like war or natural disasters might shoot the price back up, what investors should make of production decline curves, and more. Also, the two examine news out of OPEC, and what this week's developments could mean for oil in the next few months.

A full transcript follows the video.

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This video was recorded on May 16, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, May 18, 2017, so we're talking about energy, materials, and industrials. I am your host, Sean O'Reilly, and joining me in the studio is a man who needs no introduction, Mr. Taylor Muckerman. What's up, man?

Taylor Muckerman: Then why are you introducing me?

O'Reilly: You don't need one.

Muckerman: Oh, but we'll do it anyway.

O'Reilly: You're that special and important and cool.

Muckerman: Only on this show.

O'Reilly: No, you're important internationally. So, Saudis and Russians.

Muckerman: Yeah, they're doing it again, extensions.

O'Reilly: On today's show, Motley Fool energy contributor Matt DiLallo has a very interesting piece at the top of, and it's: "What Would It Take to Get Oil Back to $100 a Barrel?" This is, of course, a question that's been on everybody's mind for 2.5 years now.

Muckerman: Since the last time it was over $100 a barrel. [laughs] 

O'Reilly: I appreciate you razzing me over stating the obvious. Well, some of our listeners might not think about how long it's been.

Muckerman: Yeah, November of 2014.

O'Reilly: But, first, we have to talk about two parties that desperately want oil to be $100 a barrel, which is Saudi Arabia and Russia. On, what was it, Monday of this week, OPEC got together in Beijing, China.

Muckerman: Of all places.

O'Reilly: I think they were like, "We have to see what demand is doing over here."

Muckerman: Chinese demand has been waning a little bit.

O'Reilly: Although, on the other hand, I think their domestic production has fallen 80% year over year, so that's not great. Anyway, after the meeting, Saudi Energy Minister Khalid A. Al-Falih, and his Russian counterpart, Alexander Novak, I'm totally getting that right, I think, the two ministers agreed to do whatever it takes to achieve the desired goal of stabilizing the market and reducing commercial oil inventories to their five-year average level. So, they want oil inventories to be lower. The Saudi Oil Minister added, "We've come to the conclusion that the agreement needs to be extended." Oil, of course, popped, what was it ...

Muckerman: 3.8%, almost $50. Almost $50.

O'Reilly: It's come down a little bit throughout the day. Between these two countries alone, you're talking about 20 million barrels a day of crude production and the planet produces 90-something. Is it 94? So, this is a little over 20% of global production in that room, never mind the rest of OPEC in there. I'm pretty sure, correct me if I'm wrong, OPEC is at 40%-45% of total global production?

Muckerman: If you add it all together, that sounds about right.

O'Reilly: And I'm including, of course, Venezuela. They really want oil up. [laughs] 

Muckerman: They're trying.

O'Reilly: I had a friend who asked me what was up, and I was like, your guess is as good as mine, but the Saudis really want that Saudi Aramco IPO to go really well in a couple of years.

Muckerman: Yeah, they're talking, $100 billion, $1 trillion, maybe.

O'Reilly: I think we might have mentioned on the show a month ago, but the Saudis want Aramco to be valued at $2 trillion. By the way, Apple just crossed the $800 billion mark consistently.

Muckerman: Well, Apple isn't sitting on a bunch of oil reserves. They're just investing $200 million in Corning --

O'Reilly: The Saudis don't have the iPhone, or the Apple car, or whatever it is they're doing.

Muckerman: They don't have an Apple car, either.

O'Reilly: [laughs] Touche. Yeah, they're trying to make the brain for or whatever, relax. Give Tim Cook some leeway.

Muckerman: Not anymore.

O'Reilly: I don't know if you saw, but Bloomberg had that piece a month or two ago, I think we mentioned this, but they've having a hard time justifying the $2 trillion valuation, even if oil got up there.

Muckerman: The valuation is reliant on future cash flows. So, if the demand for oil and production from other places around the world are rising, cash flows might not be there to justify $2 trillion.

O'Reilly: And I think their evil plan was to select 10% of the company to the public, and then raise, ergo, $200 billion, and -- oh look, then they have the same amount of cash as Apple.

Muckerman: Yeah, they might spend it more wisely on solar projects, not just hoarding it and buying back shares.

O'Reilly: [laughs] You know what Apple does? They actually have a ton of T-bills.

Muckerman: I know, it's super unimaginative.

O'Reilly: I think they get 3% on them.

Muckerman: How do they get 3%? Are they doing 30 years?

O'Reilly: Yeah, 30-year T-bill is at 3.4% now.

Muckerman: Do you want me to trust Tim Cook, and that's what he's doing with $250 billion right now? 

O'Reilly: What are you supposed to do?

Muckerman: I don't know, invest more than $200 million in Corning.

O'Reilly: In Corning?

Muckerman: That's what they did, they invested $200 million in Corning recently, because they make the glass for their iPhones.

O'Reilly: Yeah. I would be super nervous that they were just after IP. Anyway, we're going to save this for Dylan tomorrow for the Tech show.

Muckerman: Yeah, really, pass the baton.

O'Reilly: So, Saudis want oil up for various reasons.

Muckerman: I mean, all of them too, not just Saudi Arabia. The Russians do too, which is why they agreed to cut until March, nine more months.

O'Reilly: I'm sure there's a few oil men here in the States that wouldn't mind that, either.

Muckerman: Nine more months.

O'Reilly: Yeah, they said it's going to go through March next year.

Muckerman: Traders are happy, a little volatility. At least there's volatility somewhere in this darn market.

O'Reilly: [laughs] Are you bored?

Muckerman: Yeah, a little bit.

O'Reilly: You want volatility because you're bored. That's really sadistic.

Muckerman: I'm happy watching Amazon rise 1% or more a day. I'm cool with that. But, I come in, and I see a little bit of green, a little bit of red, a little bit of green, a little bit of red. Where's my buying opportunity, Sean? Where are my buying opportunities?

O'Reilly: You realize there's going to be an epic crash tomorrow, and it's going to be your fault?

Muckerman: I don't know. We've seen some pretty questionable things happening in the Oval Office this week, and volatility hasn't spiked at all.

O'Reilly: That's true. Maybe it's like a deer in the headlights kind of thing.

Muckerman: I don't know.

O'Reilly: So, what would it take, Mr. Muckerman, and you're going to be aided by Mr. Matthew DiLallo, TMFmd19, he also has a Twitter handle, MatthewDiLallo. He has a really cool piece on the top of right now. Here's what would need to happen for oil prices to get back to $100 per barrel. First reason, we probably need to explain the second one a little bit more, but, OPEC overshoots, and it gets into what we were just talking about. Is it possible that, with the supply cuts and the lack of investment and their desire to get inventories to their five-year average, they overshoot? Because not only do we not have great data on them -- I wonder how good of data Saudi Arabia has on Venezuela, do you know what I mean?

Muckerman: I don't know, I feel like they probably share quite a bit inside the consortium of OPEC countries.

O'Reilly: I would think it would leak, then.

Muckerman: This is not the White House, Sean, this is OPEC. They're tight. They run a tight ship. This is their country at stake, they're not going to leak that kind of stuff.

O'Reilly: [laughs] Are you salty about what's going on? 

Muckerman: [laughs] No, just being topical. Yeah, I mean, it's very possible. They obviously didn't think that U.S. producers were going to ramp up this quickly, so they underestimated. Maybe they have a chance to overestimate their own ability to cut. And maybe like you said, underinvestment by other companies around the world catches up to them. I don't know if that will catch up to us in the next nine months. But it's possible, for sure.

O'Reilly: I know we've talked about this in the past, and gosh, we were talking about this when Tyler Crowe was a regular guest -- we miss you, Tyler. Come back soon. Actually, I should probably have him on.

Muckerman: Yeah, you should have him on.

O'Reilly: But, the decline curve never sleeps. Really quick, for anybody that's new, what the heck is a decline curve?

Muckerman: It's basically the curve of production for an individual well, or a collection of wells. Basically, they have decline curves for each individual well, so you can see the initial production and then production over the time. And generally shale wells have a steeper decline curve, meaning the average daily production declines more rapidly than a conventional well, like a Saudi Arabian well or offshore oil. Conventional generally has a much flatter decline curve. You're talking about losing significant percentages of overall production in a very short amount of time, which is why they've been drilling so much in the shale regions. Because you have to keep up production.

O'Reilly: The best analogy I've ever heard, and for anybody who ever asks me at a Christmas party or something, it's a kiddie pool in the backyard. You have a pool, and you're draining it at the end of the day, and you pull the drain plug on the side, water comes rushing out at first, and that's the first couple of days or months of these wells. Towards the end, when there's not a lot of volume pushing out --

Muckerman: Yeah, you're losing your pressure.

O'Reilly: -- it comes out as a trickle, and that's what we're talking about here. So, if you're not investing in new wells, if you're not drilling new wells, eventually production runs out, and that's what we're talking about here. This has been a major thing with the CEO of Core Labs. He talks about the decline curve a lot. And they have a lot of amazing data on --

Muckerman: They're not talking about their stock price. [laughs] 

O'Reilly: God. What did you think about that bear case, by the way? Sidebar.

Muckerman: I definitely agree, and I've said it before, that this company's future was relying on offshore, deepwater oil.

O'Reilly: And if that's not happening ...

Muckerman: If that's not happening, then a lot of projections for this company's success in the next five or 10 years need to be reevaluated. And that was one of the points that was brought up the Sohn Conference, that deepwater isn't doing what they expected.

O'Reilly: Right. Because deepwater, even with the technology advancements, as I understand it, it needs $70-$80 for people to be thinking about it.

Muckerman: Yeah. Those rigs cost a lot of money, the day rates with staffing ...

O'Reilly: The risk, the hassle. You're going 3,000 feet beneath the surface of the ocean --

Muckerman: Before you even start to drill.

O'Reilly: Yeah. It does sound like a bit of a pain. So, this has been a major bull case put forth by the Core Labs CEO. The report that DiLallo cites notes that the industry needs to develop 2.8 million barrels of new production capacity per day just to offset declining and depleting legacy output, which isn't something shale alone can handle at current oil prices. This goes on to say that that actually needs to happen by the end of the decade. So, whoever, Saudi Arabia, Venezuela, China, whoever, needs to go find 2.8 million barrels of daily oil production at some point in the next couple years, otherwise there's going to be a supply shortage by the end of the decade.

Muckerman: I don't know, I think they already have it found, it just needs to be justified to drill it.

O'Reilly: OK. So, you think they know where it is? Then you get into the offshore stuff you were just talking about.

Muckerman: Yeah, Venezuela has the largest oil reserves of any country in the world, but they can't produce it, because they can't produce it at the right price. So, once they can, that oil will be there. It just depends on if the price justifies being able to produce it.

O'Reilly: Got it. So, this is always a problem with oil, but, wars. That's No. 3.

Muckerman: No. 3, wars and rumors of wars. We've had a few of those recently, hasn't done much to the price of oil. Kind of like how it was back with the Arab Spring, when prices were sky-high. They were too high to react to uprising in the Middle East. Now, they're too low because production is capable of producing at prices like this, so prices aren't wavering on possible news out of Syria or nuclear war with North Korea, or anything of that nature.

O'Reilly: So, I'm going to play devil's advocate, if I may. We've gotten little hints of what might happen -- we've definitely had some conflict, that's mostly cold conflict. But, we got a hint a couple of months ago of what might happen if something really bad happens in a reasonably large producer. I'm, of course, referring to the Libyan oil field outage. Their pipeline was in jeopardy, the field was still producing but if you can't move it, what you going to do? But that was 300,000 barrels per day of oil production. And oil was higher after that than it is now after the Saudis and the Russians saying they want to cut production more.

Muckerman: 300,000 barrels is around a quarter of what OPEC and Russia have been cutting, so that's a pretty decent amount.

O'Reilly: So, it would be another quarter to a third. I would wonder what happens if a bigger producer has a problem.

Muckerman: I don't want to even think about that right now.

O'Reilly: Conjecture?

Muckerman: Yeah, it would be bad.

O'Reilly: Well, that's what he's saying. We don't know, but it could be bad.

Muckerman: It's definitely possible. Hopefully we're not involved.

O'Reilly: Oh, wow, I didn't know this. He cites with this, through the Persian Gulf, 17 million barrels of oil flow through the Strait of Hormuz every day.

Muckerman: Yeah, that's a critical choke point. That's no joke.

O'Reilly: That's 20% of global demand.

Muckerman: There's a similar Strait in the South China Sea. If you look at both of those, it's pretty heavily fortified naval presences by multiple different countries in all of these areas. Isn't the Strait of Hormuz right around Iran?

O'Reilly: I think it's next to Egypt. Let's see.

Muckerman: We're both googling it. Who can google it faster? Oh, I got it.

O'Reilly: Is it next to Yemen?

Muckerman: My map is coming up in a foreign language. Iran, it's Iran, UAE and Oman.

O'Reilly: What was I thinking of? Oh, the Suez Canal. My bad. That's also somewhat important, actually.

Muckerman: It is, but not as important in terms of oil as the Strait of Hormuz itself. A lot going on there.

O'Reilly: This second to last one, the next point is the wrath of God, wrath of nature. We got a bit of that back in 2005, when Katrina hit. That hit Louisiana and south Texas, Houston, and that's somewhat of a problem, because that's where all of our hubs are.

Muckerman: Yeah, I think when you think about that, it might impact refining a little bit more, so that could drive the prices up, because they have to shut down refining facilities, so then there's a backlog, when they come back online --

O'Reilly: So, gasoline prices would then go up, which would incentivize oil prices to go up, to refine it somewhere else.

Muckerman: Yeah, and then they have to catch up to production, once the refineries come back online. I think a hurricane generally hurts the refiners a little bit more.

O'Reilly: Yeah, this was a cool statistic. Katrina, when it hit in 2005, it knocked out 95% of the oil production in the Gulf of Mexico, and at the time, it supplied 1.5 million barrels per day, which was 30% of America's oil production back then, it's obviously lower now.

Muckerman: Ha, we were only producing 4.5 million barrels of oil per day back then.

O'Reilly: What if something bad happens, Act of God, earthquake, something crazy somewhere else that produces a couple million barrels per day?

Muckerman: It could have an impact, hard to tell how much, now that we're producing oil in a bit more of a widespread nature. But yeah, certainly other areas of the globe, if you had another nuclear disaster somewhere people might rely more on oil or natural gas for energy, certainly, anything's possible there. But, I think that one is just too hard to predict.

O'Reilly: So is this last one. Drumroll, please. Matt DiLallo says the sleeping dragon demand awakes. Most people don't know this, but demand for oil globally is up 1.3 million barrels in 2017 over 2016. And it does make you wonder what happens if, I don't know, economic growth in India goes up a bunch next year or something.

Muckerman: Yeah, a billion people. What is that, three times more people than we have?

O'Reilly: I wonder if they sell Teslas down there.

Muckerman: I don't think they do. But I'm sure if they have infrastructure, electric cars can't be too far behind. Out of all of those, I would say OPEC overshooting or a war would be the top two that I would be worried about.

O'Reilly: I'll buy that.

Muckerman: Wrath of nature could, but --

O'Reilly: You recover after a month.

Muckerman: -- more unpredictable. The decline curves, yeah, that's definitely a worry, but I think we have enough wells in the United States and worldwide to overcome that, if prices creep up into the $60-$70 range. We'll find those extra 3 million barrels that we would need at the prices that would warrant it before it crept up to $100. I think it would take a combination of two or three of these five within a short amount of time to really ramp back up to $100 of a barrel. Because everyone would produce at $100 a barrel, everyone.

O'Reilly: Yeah. Heck, I would, I would go buy property and get a drill.

Muckerman: Everyone. And, in America, we're producing as much as we can produce right now. OPEC and Russia, they're producing not as much. So, the moment that prices justify it, that 1.2 million decline in their production could be turned on in such a short amount of time compared to people having to go out and drill to find this oil, that I don't think prices are going to go back to $100.

O'Reilly: Because that's instantaneous, more or less.

Muckerman: Yeah, very much so, relatively instantaneous.

O'Reilly: Cool. Thank you for your thoughts, Mr. Muckerman. We'll see you next week.

Muckerman: Yeah, thank you Matt DiLallo for your thoughts, as well, inspiring this show.

O'Reilly: All right, that is it for us, folks. Be sure to tune in tomorrow for the Technology show with Dylan Lewis. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly, thanks for listening and Fool on!