Editor's Note

04/05/2007 12:00 am EST

Focus:

Howard Gold

Founder & President, GoldenEgg Investing

Thursday, April 5

When 15 British sailors and marines landed at London's Heathrow Airport Thursday morning after nearly two weeks in Iranian captivity, some of them must have wanted to kiss the ground.

Across the Atlantic, energy traders on the New York Mercantile Exchange may have wanted to kiss the profits they made from the recent run-up in crude oil, which changed hands at around $64 a barrel Thursday.

But although the current crisis has eased, I don't think we should celebrate lower oil prices just yet. In fact, despite a slowing US economy, I believe oil prices may head higher again. That, of course, wouldn't be good news for stocks or bonds.

The reasons are threefold: seasonal factors, Iran, and continuing supply issues. (And here I'll make full disclosure: My wife and I own small positions in the OIL ETF, which is tied to crude prices.)

Summer driving season, which begins around Memorial Day, usually sees a nice rise in the price of crude and gasoline. In 2005, crude prices rose $14 a barrel by mid-August, two weeks before Hurricane Katrina struck.

Last year, crude rose much earlier, so by Memorial Day it sold for $20 a barrel more than it did at that point in 2005. It ultimately topped $78 a barrel last summer during the war between Israel and Hezbollah.

Unleaded gasoline now changes hands at an average of $2.71 a gallon nationwide, up nearly 10% from a month ago and a dime a gallon more than it went for last year, according to the Oil Price Information Service.

So, I suspect we've seen some of the seasonal move already.

But probably not all of it. This week, noted forecasters from Colorado State University issued their latest predictions for the upcoming Atlantic hurricane season, which will stretch from June 1 to November 30.

The experts, led by Professor William Gray and research associate Phillip Klotzbach, are now calling for "a very active hurricane season." 

The team projects 17 named storms, nine hurricanes and five major hurricanes-well above average-with a 74% chance that at least one major hurricane will strike the US mainland.

That would not be as active as the devastating 2005 season, but would be far busier than last year-which, incidentally, turned out to be half as intense as these same forecasters expected. So much for investing based on long-range weather forecasts!

But you don't need a weatherman to know which way the wind blows in the Persian Gulf.

The latest confrontation with Iran has ended, but there will no doubt be others, as the US and Iran's mullahs play a military/diplomatic chess game reminiscent of the bad old days of the Cold War.

In the last few months, US troops seized five Iranians in northern Iraq amid allegations of espionage. The US also has dispatched a second aircraft carrier group to the Gulf, and breaking with tradition, has put its critical CENTCOM regional command under an admiral, William J. Fallon.

It's all part of a drive to turn up the heat on Iran over its nuclear program, which the Islamic Republic vows is purely for peaceful purposes, a claim no one else believes.

We've seen a flurry of diplomatic activity as the US and some European countries move for tougher sanctions against the regime of President Mahmoud Ahmadinejad, which remains publicly unbowed.

Ultimately the mullahs behind the throne may agree to some combination of restricted access to nuclear materials and a stepped-up inspection program, patterned after the recent six-party agreement with North Korea.

But everything we've seen so far suggests they'll go to the very brink first, which would drive crude prices higher. 

Finally there's the long-term supply picture. Thursday's Wall Street Journal had a page-one story on the astonishing decline of Mexico's giant Cantarell offshore oil field, which produces one out of every 50 barrels on the world market.

Production, the Journal reports, "is fading so fast Mexico may become an oil importer in eight years." It would also "leave the US even more dependent on Middle Eastern supplies."

That sure seems to give credence to the "peak oil" theory, which got a lot of coverage a couple years ago (and about which I was skeptical at the time).

Formulated 50 years ago by Marion King Hubbert, a Shell Oil geophysicist who later taught at Stanford and UC Berkeley, the theory holds that every oil field's production drops rapidly after it hits its peak. Hubbert predicted US domestic production would peak around 1970. It did, and the US, as we all know, is the world's largest net oil importer.

Noted investment banker Matthew Simmons, a follower of Hubbert, says production for the world as a whole peaked in 2005, and Saudi Arabia itself will see peak production soon.

Saudi officials dispute that, and Daniel Yergin of Cambridge Energy Research Associates, author of "The Prize," says the world's energy reserves are three times what the peak oil theorists claim. He doesn't believe world oil production will peak for another quarter-century.

Now I'm no oil geophysicist, so I can't take sides in this dispute, but it seems to me that with the rapid development of China, India, and so many other emerging nations, demand for oil will only keep growing while added production, even aided by new technology, won't be able to take up the slack.

Only a major depression or stringent economic restrictions to prevent global warming could halt consumption growth. I think the probability of either is pretty low. That's why oil prices are likely to move higher in the coming months and beyond.

Comments? Please E-mail us at TopProsTopPicks@intershow.com

Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions expressed in this commentary are his alone and do not reflect the views of InterShow.

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