Tuesday, October 11, 2005

Oil Tycoon: Prices Will Rise Higher


By Brad Foss
June 23, 2005

NEW YORK -- Oil tycoon Boone Pickens' bet that energy prices would rise made him more money in the past five years than he earned in the preceding half-century hunting for riches in petroleum deposits and companies.

Even as crude futures have doubled since 2000 to almost $60 a barrel, the 77- year-old Texan sees no reason to take his chips off the table.

"I can't tell for sure where we're going, other than up," Pickens said in an interview.

His outlook stems from the belief that a world oil-production peak is near and that, while the world won't soon run out, supplies will remain tight because of rising consumption and geopolitical uncertainty in the Middle East. The high prices haven't yet taken the wind out of the U.S. economy, he said, because of efficiency gains made in the past 25 years. Down the road, however, he anticipates more serious pain at the pump until, eventually, fossil-fuel consumption tapers off and alternatives become more popular.

Coming from about anyone else, those comments could be dismissed as a routine oil-price prediction. But the matter-of-fact views of Pickens carry more weight than the average analyst's hunch.

Pickens started his career in the 1950s as a petroleum geologist, built his reputation in the following decades as the founder of Mesa Petroleum Co., and enshrined himself in the history books in the 1980s with attempts to take over major oil companies.

But Pickens' star faded in the 1990s, when he lost control of the debt-ridden Mesa and when his bullishness on natural-gas prices, while prescient in hindsight, turned out to be a costly mistake. "I was ahead of my time once again," quipped Pickens, who also likes to point out that "you can be dead right -- and dead."

Now, Pickens is riding high again as the chairman of BP Capital Management, a billion-dollar hedge fund focused on energy commodities and equities that has delivered mammoth gains.
BP Capital manages roughly $2.5 billion in assets, which are split three ways between the equity fund, the commodity fund and Pickens' personal wealth, according to Chief Financial Officer Dick Grant. An investor who contributed $1 million to the commodity fund at its inception in 1999 has seen a return of $28 million, while an investor who put $1 million in the equity fund at its inception in 2001 would have $3.7 million.

"I've never had so much fun in my life," Pickens said.

Pickens does not believe the current tightness in the oil market will be resolved by a surge in supply, and he sees $50 a barrel as a price floor. When he does the arithmetic -- the world will consume more than 30 billion barrels of oil in 2005 -- Pickens is convinced that OPEC and the rest of the petroleum industry will never again be able to build a sufficient supply surplus to give the market a psychological cushion. Even if the world can produce more Saudi Arabia claims to have reserves of 250 billion barrels limited refining capacity will continue to be a problem, he said.

At the moment, the world's excess production capacity is about 1.5 million barrels per day, or less than 2 percent of total global consumption. That has traders nervous about the possibility of hurricanes, terrorist attacks and labor strife in key oil-production regions.

Only one thing could undermine his position as a market bull: a sharp drop in energy use, either from an economic recession or because skyrocketing prices get people to think twice about taking a long drive. Pickens believes the United States and other industrialized nations are in for a rude awakening within the next year as oil producers struggle to keep up with growing demand in the United States, China and India.

"You're going to hit a brick wall is what's going to happen," said Pickens, who foresees oil prices above $60 a barrel oil and gasoline at $3 a gallon.

Longer term, he expects very high prices to change consumers' habits. Already, he said, "you're coming to the end of the SUVs as far as being center stage."

Although he is philosophically opposed to government intervention in business, as a practical matter he said higher taxes on gasoline, and incentives for fuel-efficient cars and wind power may be necessary to smooth out the transition to the post-petroleum era.



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