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Eating Crow Re Oil Price -- KrazyHorse wins by more than a few lengths
On March 24, 2006, five years ago, KrazyHorse and I made a bet as follows...
I took the less than $64 end of the bet, which couldn't have been more wrong. The closing price on March 24, 2011 was $105.60, or 65% greater than the agreed strike price.
I doubt that KH had high confidence in his side of the bet when he made it -- the futures contracts implied roughly a coin flip. However, you pays your money and you takes your chances...
To my mind, the biggest factor that I did not consider was the relentless increase in Chinese demand for oil. The Chinese way of life has changed dramatically in these past five years. In a few of the major cities, most people drive cars to work whereas five years ago most rode bikes. Meanwhile, many more Americans ride their bikes to work than they did five years ago. Who knew.
Despite Chinese demand, I still think that the price of oil is too high. Put simply, at $105.60, even the most marginal of producers make very good money. Also, new technology is being introduced to minimize oil use. These changes are not in the long-term interest of the Saudi Arabias of the world.
Further, drilling methods in conventional fields have become much more sophisticated in the last few years. Nowadays you hear a lot about shale natural gas production finds. But these drilling methods can be applied for oil fields as well throughout the world.
In any event, I was wrong, KH was right. And he is $1 richer.
The price of light sweet crude will be lower in five years than it is today. A strike price of $64 nominal is agreed. Amount of bet: $1.
I doubt that KH had high confidence in his side of the bet when he made it -- the futures contracts implied roughly a coin flip. However, you pays your money and you takes your chances...
To my mind, the biggest factor that I did not consider was the relentless increase in Chinese demand for oil. The Chinese way of life has changed dramatically in these past five years. In a few of the major cities, most people drive cars to work whereas five years ago most rode bikes. Meanwhile, many more Americans ride their bikes to work than they did five years ago. Who knew.
Despite Chinese demand, I still think that the price of oil is too high. Put simply, at $105.60, even the most marginal of producers make very good money. Also, new technology is being introduced to minimize oil use. These changes are not in the long-term interest of the Saudi Arabias of the world.
Further, drilling methods in conventional fields have become much more sophisticated in the last few years. Nowadays you hear a lot about shale natural gas production finds. But these drilling methods can be applied for oil fields as well throughout the world.
In any event, I was wrong, KH was right. And he is $1 richer.
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