Law of Supply and Demand: We have the Supply so we can Demand whaterver we Want

Outlook for oil prices from Stephen Leeb, much of what he says also reflects views of Matthew Simmons, (Simmons & Company is the largest independent investment bank specializing in the entire spectrum of the energy industry).

Leeb's comments:

We hope we're wrong. But that's exactly our sentiment regarding our bullish long-term outlook for crude oil prices. Unfortunately, since writing our cover story for the April Income Performance Letter, several disturbing news reports have come out that reinforce our view.

First up, Saudi Arabia's King Abdullah announced that he has ordered Aramco to leave some new oil finds in the ground so as to preserve the country's oil wealth for future generations. Quoting the king, "When there were some new finds, I told them, 'no, leave it in the ground, with grace from God, our children need it'."

There have been no reports of any new discoveries in the Kingdom. (Simmon's says the same thing) The only news we've come across has been more dry holes drilled in the Rub' al-Khali, or Empty Quarter, in southeastern Saudi Arabia. The vast dessert region has long been held out by the Saudis as a promising area for new oil and gas discoveries, although nothing has been found there in commercial quantities. In fact, French energy giant Total recently walked away from a joint venture there with Shell and Aramco after searching in vane for four years for natural gas in two separate parts of the region.

We therefore have to presume the king is referring to keeping future oil discoveries in the ground. Or--and this is more likely--it could be his way of saying "don't expect greater oil production from us."

Shortly thereafter came a more ominous report along the same lines. The Saudi oil minister, Ali al-Naimi, told industry newsletter Petroleum Argus that the country saw no need to increase its production capacity beyond its planned 2009 target of 12.5 million barrels per day (bpd). The Saudis' production capacity is believed to be around 11 million bpd now.

The world currently consumes around 86 million barrels per day of oil and associated liquids. Al-Naimi cited a greatly reduced demand forecast for oil as the reason the country wouldn't add to its production capacity. The minister believes that by 2030, instead of consumption of 130 million bpd, the world will only want 106 million bpd of oil. He blamed part of this reduction in demand on expected growth of biofuels.

But biofuels simply won't scale that high, nor has the growth in biofuel consumption ever matched forecasts. ( And it's contributing to food shortages and increased pollution. Corn ethanol requires more energy in than is gotten out) What's more, it's hard to envision oil demand rising by less than 1 percent a year going forward when Chinese and Indian auto sales are surging 15 and 10 percent annually to name just one stat.