What You Need to Know About the Oil Market

WEST PALM BEACH, FLORIDA – Yesterday, I saw this comment from an offshore oil worker… 

“In offshore, we don’t shut in fields, we shutter them. You begin the process of leaving them forever.”

This simple statement leads me to two important conclusions… (More below.)

Road Trip Ahead

Greetings from West Palm Beach, Florida…

We’re preparing to hit the road again. It’s daunting.

We feel homebody inertia from 44 days in quarantine. Plus, we don’t know what it’s going to be like on the road in America this summer.

Will we be able to visit national parks and sleep in campgrounds? Will we be sent home? What if we catch coronavirus? Will locals be hostile to outsiders?

We’ll see. We hit the road in two weeks…

In the meantime, we’re tying up our loose ends.

I’m leaving my laptop behind, so I need to complete all the chores that require computer access now. And if we need to buy things online, we need to do that now, before we’re homeless again.

And of course, I’m putting the final touches on the new premium newsletter project I’ve been working on for the last two months.

But back to oil…

My Two Conclusions About Oil

Here’s a simple but very important fact:

You can’t “just” turn an oil well off. And you can’t “just” turn it back on again afterwards.

Actually, most of the time, when you close an oil well, it stays closed forever. If you want to extract oil from the same spot in the future, you have to start from scratch.

This applies to deep sea drilling. This applies to oil fields in dangerous and unstable countries like Nigeria. And this applies when you’re drilling in frozen ground. 

(Actually, the only type of oil production this doesn’t apply to is shale. Shale production can be turned on and off. The problem with shale is it’s expensive and uneconomical below $45 but probably more like $60… so once they turn it off, they won’t be in a hurry to turn it back on.)

This simple fact about the “stickiness” of oil production leads me to two conclusions…

First, even though prices have crashed, producers are not going to stop producing oil until the very end. They will do whatever it takes to keep going.

I’ve seen this called the “slope of hope.”

So there’s going to be a long, terrible recession in the oil business caused by a persistent glut of oil that will last – in my opinion – for much longer than anyone expects.

Second, when it’s all over, oil prices are going to soar.

Consider this… The all-in, long-term, worldwide total cost of producing a barrel of oil is between $50 and $60 a barrel, according to the International Energy Agency.

That’s just the starting point for how high oil will go when the glut fades…

Deflation vs. Inflation: What Does It Mean?

I get a lot of questions from readers asking about deflation versus inflation.

The answer to this question is in the oil market: The longer prices deflate now, the greater prices will inflate in the future.

This is the reason I’ve written so much about “stagflation.”

The “stag” part creates a terrible surplus in the economy. Too much supply and not enough demand causes prices to fall and inventories to build.

This is what we’re seeing in oil. It’s what we’re about to see in businesses and sectors all around the world. 

Then, when producers finally throw in the towel, supply shrinks, demand returns, and the surplus fades, you get the “flation” part of the cycle. Prices soar.

We’ll see this very clearly in the oil market because the oil market is not being manipulated by the central bank.

But the dynamic applies to almost any free market, including housing, entertainment, shipping, mining, retailing, etc… 

I’ve even been teaching this concept to my boys at bedtime.

Free markets are self-correcting. Low prices now cause high prices later. “Stag” leads to “flation.”

As an investment analyst charged with anticipating future trends and price movements, this is my most fundamental knowledge about economics. 

So from an investment strategy point of view…

If you’re only interested in oil, you want to own oil tankers NOW, and oil producers LATER (the ones that survive.)

For everyone else, you want to own gold NOW, and stocks LATER (the ones that survive.)

– Tom Dyson

P.S. Energy is the fundamental resource that supports all commerce. The “stag” and “flation” we’re about to see in energy will be a big influence on the “stag” and “flation” we’ll get in the greater economy.

P.P.S. Part of the reason bailouts and prop-ups are so dangerous is they impede the price-discovery process that ultimately leads to higher prices and recovery. 

Like what you’re reading? Send your thoughts to [email protected].

In today’s mailbag, readers wish the Dysons well as they prepare to hit the road… reminisce about meeting Tom and Kate in person… share what they’re learning from the Postcards… and ask about whole life insurance…

Reader comment: Please cut the redundant storyline and give us some fresh news and information.

Reader comment: Read your message on why you left everything behind and took off years ago. Thank you for sharing your personal side. I wish you and your family happiness and good health. Hope you enjoy the upcoming camping tour after the lockdown is lifted.

Reader comment: From the “fringe” says exactly what you are experiencing. Trying to gather some sort of meaning, as to WHY, when a person feels like they may be standing on the edge, watching everything just come undone, or unraveled. You wonder why no one else seems to notice, or if they do, why no one is doing anything about it, or saying anything to anyone else.

It causes a depth of discomfort that is unbearable. It’s a harsh realization that nothing is as we’ve been told, and that there is a good chance that the majority of the people around us, are living in a different state of “being” than WE are.

Thank God that you have Kate, and your kids. And thank YOU for sharing your experiences, and being able to put into words what most cannot. No matter how miserable it may seem at the time, to have an “awakening”… Imagine how awful it would be to NOT. We are in interesting times, to say the least. You are, by no means, ALONE though… ever.

Reader comment: At my first Stansberry Conference in November 2009 at Kiawah Island, I went for breakfast on getaway day and sat down at a table. The dining room was crowded, as the event was effectively over. Tom approached with Kate and politely asked to join, as I was alone. Tom and I were conversing about people we might have known in common from his Salomon days, which overlapped with my time at Bear Stearns.

What sticks in my mind was how curious Tom was about my thoughts and how interested Kate was in a conversation that could be annoying for most other people not from that industry. I am so happy that, despite the rocky path, both of you have found such a better place, and the gift of three wonderful children in the ensuing 11 years. You are special people and are teaching your children more than you could know. God bless all of you.

Reader comment: I have really enjoyed reading about your adventures. Little did I know how unusual your life would become when we met briefly in August of 2015. I had been invited to Delray Beach to share my successes as a Palm Beach Research Group member in some interviews with Bob Irish. It was a delightful few days getting to know Mark, the PBRG team, and other happy clients.

What I recall of you was a dashingly handsome young man with an equally compelling accent and infectious enthusiasm. You were chatting excitedly about your new wheels, which I assumed to be an exotic luxury or sporting machine from Modena or Stuttgart. I remember laughing out loud when you proudly introduced us to your brand new… golf cart! And I also remember thinking, “That’s what I really love about these PBRG folks. They’re REAL; they live in the moment and they love their work and their lives.”

Reader comment: I read your articles because, while I am concerned about what to do with my savings, I am also interested in what makes a money man like yourself tick. Your reasoning is interlinked to what you want out of life so your advice is not “cold-blooded” analysis but more what works for you. And for simpletons like me, you think creatively around the subject embracing the “what-ifs” and the “whens.”

I am a gold bug and always have been, so when you and Tim Price, whose advice I rate very highly, tell me to invest in precious metals miners that have little or no debt, it chimes with common sense. I understand common sense. I spent my life working in the media, and while I pretend to follow many of yours and Tim’s observations, it is only the simple statements that I remember. Keep them coming and thank you for keeping them relevant to real life. Good Luck!

Reader comment: Tom Dyson’s Diary… I wish he would never stop it! I’ve looked forward to it since he started… and still do very much.

Reader comment: You didn’t write much about your parents’ divorce, and they are certainly entitled to their privacy. But I am curious about your brother. Did he stay with your dad? There’s a story there. How much did you see your dad after the divorce?

Reader comment: Revealing your true self to an audience that may be inspired to do the same. I think your suffering, and then sharing that pain, has been a potentially life-changing gift to us all. Thank you.

Reader comment: I have been reading all your Postcards From the Fringe, including all the mailbag, right from its first appearance on Bonner & Partners. During that time, my esteem/respect for your ethics, sincerity and thought processes has grown by leaps and bounds so that I truly consider you to be a person who I would want to have as a close friend (and there are very few such people).

However, that esteem was greatly decreased to the point where I am now having second thoughts when I read the following text that you wrote!! “We’ve isolated ourselves from the outside world as the COVID-19 pandemic rages on… not because we’re scared of catching the virus, but because we want to do our part “‘flattening the curve.’”

As I recall, your original plan was to go back from Nicaragua to visit Kate’s parents for a short time before going off to see Argentina and perhaps other countries in South America. However, after that plan was torpedoed by the travel prohibitions of the COVID-19 situation, you had no choice but to remain at Kate’s parents’ for a longer time.

As that time went on, your plans changed to deciding to take another major trip around the mainland USA, which again I thought you were only not beginning because the U.S. lockdown nonsense would make it difficult and problematic (as it is difficult for me, a legal Canadian citizen/resident, and my wife, Kitty, a U.S. citizen/resident, to get across the Canadian border to return to our summer Canadian residence).

To now find out that you have “bought into” the U.S. health deep state and media, fear mongering, and insane dictates insisted by such ilk as Anthony Fauci (as the last part of your text certainly seems to imply), is very disheartening indeed.

Reader comment: I need to know about your investment in the Permanente Whole Life Insurance thing you were so passionate about not so long ago. Call me a fan of your old self as well as the new man. Would love for you to make a brief mention of the 702(j) retirement plan. Thank you.

Tom’s response: Still have it. Never selling it. Love it. It’s been eight years now. 

And, as always, thank you for your notes and messages! Please keep writing us at [email protected].