Frank, the BARRON'S article seems to reflect several comments on this (and the earlier) thread; namely, that a drop in crude oil and natural gas prices means a drop in profits for companies at virtually every stage of the exploration, development, transport, refining, marketing and distribution chain. I do not disagree about near term lower prices, but that doesn't mean there's nothing worth buying in this area.
First, I think oil and gas producers would have to show that their reserves remain profitable at prices less than the current prices of oil and natural gas, or less than the estimates of prices for the next couple of years. There are many marginal producers who may not do too well if the cost of production added to the cost of the existing assets comes close to the market price for crude oil and natural gas. Not all producers will be unprofitable, even if oil drops to $20 per barrel and gas drops to $2.50 or so.
Second, although demand in the U.S. and Canada may not expand very rapidly over the next three or four years, demand elsewhere, particularly in China, is increasing at rates close to 20 percent or MORE annually. That's because of the increasing reliance on motorized vehicles (replacing bicycles, among other things), coupled with the need to adopt cleaner electric power generating plants in the Beijing area, in preparation for the 2008 Olympics. Demand for oil and natural gas fuels in developing countries is the key factor in assuring that prices of these commidities will not plummet, and in fact, that prices are likely to remain stable over the next year or so.
I do not agree with the belief expressed in the BARRON'S article that the Arab countries lack discipline sufficient to prevent further drops in the price of oil. As downward pressure continues to increase, it is likely the OPEC nations will be less inclined to remove restrictions on Iraqi oil. The removal of these restrictions is the only event that I can see, which would really cause prices to drop. Assuming prices don't drop (my assumption), I am optimistic about the near term prospects for some primarily producer oriented companies. I'm not particularly impressed with any of the companies mentioned in the article, however.
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