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Mike Norman, HardAssetsInvestor.com (Norman): Hey everybody; welcome to HardAssetsInvestor.com’s interview series. I’m Mike Norman, your host. I’m here with Stephen Schork, who is the editor of The Schork Report. We’re doing the second half of our interview looking at the oil markets.
Last time we started to get into it a little bit, this perhaps what is now a paradigm shift, in the sense that historically, oil has always been sort of a price story. Whenever we got these spikes in oil prices, you saw the consumer reaction: People would conserve, eventually the price would come down again and we’d get right back into using oil.
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But maybe some things have changed here, right? We see a big trend or a new theme emerging where people consider oil to be a dirty fuel – it contributes to global warming, greenhouse gases – at least that’s what people say. It maybe enriches nations who are not so friendly to us, so there’s a geopolitical element here, and now at least I see for the first time as we have experienced this steep drop in prices, there is still momentum to go down this route.
What sort of an impact, even at the margin do you think, long term that’s going to have on the price of oil if indeed this is a new mandated policy, that we have chosen this as a nation to go down this path? It seems like the new president, President Obama, he wants to pursue this; he’s committed to this. What does that mean for the price of oil long term? You said in our first interview that that spike we saw last year was a bubble of once in a generation. So is this part of your thinking here, this sort of change in behavior?
Stephen Schork, editor of The Schork Report (Schork): This is an absolute change in behavior. Now, Mike, as a trader, I never like to say, this time it’s different, that we’re not going to get ourselves hooked back on oil the way we did in the post-1970s crash, post-1980s crash, post-1990s crash.
There are two schools of thought here and you just articulated them, and I call them the 911 school and the Al Gore school. The 911 school are people … we all remember that tragic day; oil money to a great extent financed what happened on that day.
So there’s certainly a push now, especially with the amount of communication … I can go onto the Internet and I can get a translation of what some of these more radical imams are saying in their Friday afternoon services. I know what my petrodollars are in part funding.
There’s also the Al Gore school. Now regardless of whether or not you think global climate change is actually manmade, it doesn’t really matter what you think. There’s enough people, and as you just said, the administration is here. So we are certainly going down that route.
Now OPEC – producer of 40% of the world’s oil – they are aware of this and they are certainly concerned about their loss of market share, because what does OPEC do? They produce oil and that’s all they do. If you take away that market share from them, they are going to do what any business would do: They are going to defend that market. How are they going to defend that market? They have to keep oil at a certain level; they have to keep it below what these alternative fuels are going to demand in the market.
Norman: What’s the threshold? OK, so we understand that they have to keep it below. There’s also a problem in that because it’s not purely a market-driven process. You have government subsidy here, so where do they have to keep it to even make government subsidy, that the government’s going to say, hey, we don’t want to do this because we don’t want to subsidize it. That’s a tough thing; they might to have to keep it really low for a long time.
Schork: Well, they’re going to have it low for at least the next four years with this administration certainly, and right now all the analysis is the marginal economic break even for Syncrude … this is the tar sand crude that we get out of Alberta, of the heavy oil down in the Orinoco belt in Venezuela … is $60 to $65 a barrel. So they need oil at at least that price threshold.
If they can get oil at $60 to $70 a barrel, that’s certainly going to help retard the push toward alternative fuels, because regardless of the 911 school or the Al Gore school, if oil goes back, or gasoline goes back to $4 a gallon, if home heating oil goes back to $4, you know what? You can put the environment to the side – Americans are going to want the cheaper energy source. That is the one balancing act that both the governments and OPEC now have to try to play off one another.
Norman: You get the sense that they’re nervous, right?
Schork: They absolutely are.
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