With all we've been through economically in the past three years or so, it's still tough to comfortably predict the direction of crude oil prices and their major effect on our financial world. When energy investors predict correctly, profits galore ensue. But when they predict wrongly, the results can be far less pleasant.
For starters, think about the rollercoaster that we've already ridden in February alone, as the uproar resulting from demonstrations against Egypt's Hosni Mubarak sent crude prices skyward. They then retreated when events in the land of the pharaohs appeared to abate somewhat. Thursday, throngs of unhappy Egyptians again became incensed when the expected departure of their country's 30-year dictatorial leader turned out to be a curve ball. Now reports are coming through that he is indeed stepping down. Your guess is as good as mine whether that slight of hand -- if you'll permit a mix of metaphors -- will again drive crude higher.
That would be rough
Frankly, however, given the potential role of geopolitics on oil prices, I'm more concerned about the fallout from a potential confrontation between the U.S. and Iran than about most other potential occurrences. Such an event would almost certainly result in a shutdown of the Strait of Hormuz in the Persian Gulf, through which much of the world's traded oil is transported. I won't speculate about the stratospheric level to which crude prices could ascend under such a scenario.
So as long as the Middle East remains relatively tranquil, our best approach is to gaze even farther east -- primarily toward China -- for a reading on the likely direction of crude levies. Why China and not the U.S.? Don't we slurp up far more than double the black gold in any given day than our Chinese friends?
The obvious answer is "yes." But the more important consideration in trying to predict what lies ahead is the direction of trends. For instance, while the U.S. consumed 18.8 million barrels a day to China's 8.3 million barrels in 2009, between 2007 and 2009 our average daily consumption dipped by 9.6%, while China's expanded by 10.7%.
Let's zero in on some of the basic supply, demand, and other activity-driven considerations that affect crude prices. As 2010 drew to an end, for instance, in an annual forecast, Barclays Capital predicted that total worldwide exploration and production spending would jump to $490 billion in 2011, nearly 11% above 2010 expenditures and the highest level in a quarter century. According to the analysis, the spending stands to be most apparent in places like Latin America, the Middle East/North Africa, and Southeast Asia.
Crude at the century mark
Obviously, Barclays forecast is largely dependent upon a variety of factors, including crude prices, cash flow expectations, etc. As I've previously told my Foolish friends, I'm of the opinion that crude at $100 per-barrel or higher appear highly possible for at least part of 2011.
Reaching that threshold would, in my rarely humble opinion, strengthen the industry's activity, and almost certainly raise the profitability of oilfield services' three biggest members, Schlumberger
But while this direction appears encouraging, even those charged with assembling regular forecasts are finding current circumstances difficult. For instance, less than a month ago, in its January report, the Paris-based International Energy Agency, raised its global demand assessment for 2010 barrels having increased by 2.7 million barrels a day to 87.7 million day, or 320,000 barrels above its December assessment. It then raised its forecast for 2011 by 1.4 million daily barrels to 89.1 million and suggested that OPEC increase its output in the interest of price stability.
However, the agency noted that, as a result of increases in efficiency and greater use of natural gas, China's oil demand growth could slow this year versus 2010. The result might be an oil expansion for the year of 9.5%, compared to about 10% in 2010. A portion of that pullback would stem from the big nation hitting the brakes on its growth in its automobile additions: For February there were 306,865 applications for a lottery of 20,000 license plates for private automobiles.
Our brakes work too
And we in the U.S. are doing our part in the last area as well. As the Department of Transportation has noted, all types of vehicles -- buses, trucks, and cars -- rolled from 2.17 trillion miles in 1990 to 2.75 trillion miles in 2000, a 26% boost. But from 2000 to 2008, total growth plummeted to 7%, with 2008 actually registering a driving decline.
But let's return to Barclays' prognostications momentarily, and in the process perhaps hit upon another way for Fools to profitably play the bank's rather bullish forecasts. As part of the 11% global growth prediction the five constant members of Big Oil are expected to account for $94 billion of the total, giving them a 15% hike from 2009.
The bottom line
I'm therefore suggesting that, with hydrocarbons being produced farther and farther afield, and with the timing of higher natural gas prices very much open to question, there's lots to be said for investments in Big Oil companies, with their ability to travel far and wide in their quest for oil reserves, along with their increasing attention to the future of gas.
With that combination becoming progressively more vital, I urge Fools with an appreciation for energy -- I hope that means all of you -- to pay close attention to the likes of ExxonMobil
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named above. The Motley Fool has a disclosure policy.