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Gold/Mining/Energy : Ensco International Inc. (ESV)

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To: mph who wrote (1327)	6/22/1998 9:51:00 PM
From: Chuzzlewit	Read Replies (2) of 2005

Let me try my argument again in a slightly different way. Maybe it will make sense to more people than just me. Disclaimer: this is not a sexist argument -- I do most of the cooking at our ranch! Suppose you have a supply of food in your larder that you assumed was enough to last you for a couple of days. But your entire family takes off for various reasons --business trips, school outings and whatever. So your available food will last a few days longer than you had anticipated. This eliminates the need for you to go shopping as early as you had anticipated, but it simply defers the time at which you will need to replenish the larder. In other words, there is a time component in the demand for new oil. And that time component is determined entirely by the rate of consumption irrespective of the price of oil. The Asian crisis caused an inevitable decrease in the rate of consumption which lengthened the period that existing oil fields would last, thus decreasing the immediacy for new fields. I am simply arguing that the decrease in the price of oil is a coincident indicator of a decrease in the rate of consumption, but it is not a cause for a decrease in drilling activity. The decrease in the rate of oil consumption is the culprit. Only if the marginal cost of producing a barrel of oil exceeds the expected marginal revenue will we see a cessation of drilling activity regardless of the price per barrel. So my argument is that anything that increases the rate of consumption of oil helps the drillers. This includes decreasing the price of a barrel of oil. The more I think about this argument, the better I feel about it. Knowing just how ineffective OPEC is in enforcing quotas, and how useless and in fact counter-productive they are, according to my argument anyway, the more comfortable I feel about my tentative conclusions. TTFN, CTC

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