Steve Forbes On Oil

Steve Forbes was on CNBC Europe sharing his belief that the oil market is a bubble. He thinks the price will go back to $35 or $40. He does not believe in the China/India theme as being a lasting catalyst. He pointed out that they have been growing for years and years, oil production is more efficient and that no one is talking about oil being a bubble.

In any reference to the interview by show host Simon Hobbs, Simon said that Forbes thinks the popping if the bubble will "make the tech bubble look like a picnic." I watched the interview twice but was not able to glean that from Mr. Forbes comments.

So is Forbes right or wrong? I disagree with what he is saying. That doesn't make him wrong but I do disagree. In the late 1990's China exported about 2 million barrels of oil per day. China now imports, if memory serves, 4 million barrels per day. That seems like growth to me. Puru Saxena appears regularly on CNBC Asia with this little nugget about per capita consumption. US per capita consumption of oil is about 25 barrels per year. Both Chinese and Indian consumption is less than one barrel per year. As both countries modernize that fractional consumption in China and India will increase, according to Mr. Saxena. Makes sense to me. That is not to say per capita will be what it is here but up a little seems logical.

Also I am hard pressed to think that a huge bubble could occur so soon after the last one. Prices could drop but I don't think the fallout could be the same as the tech wreck.

But what if it is? What if somehow Forbes is exactly right and it hurts the entire stock market? How much energy exposure do you have? It would be correct to think of me as very bullish about oil. The most extreme weight I have in the sector for any one client is probably 13% (in most instances it is closer to 11%) compared to 9% in the S+P 500.

The tech sector cut roughly in half from peak to trough in terms of weight in the S+P 500. If the energy sector cuts in half it would have a 4.5% weight and my clients would lose 6.5% if I did absolutely nothing (worst case scenario); down a little.

For anyone with 25% in energy that type of move would be entering down a lot territory. I have to say for any sector's weight to cut in half it would probably be in the context of a general decline. I imagine on the way to this type of blow up in one sector the market would go below its 200 DMA and I might miss some of that down side.

The point here is I disagree but I can construct some thoughts on the matter in case I am wrong.