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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Wowzer who wrote (53802)	11/1/1999 10:14:00 AM
From: Tomas	Read Replies (1) \| Respond to of 95453

Future looks fundamentally sound for oil prices - Houston Business Journal, November 1 M. Ray Perryman As anyone who has followed the commodities markets in recent years can tell you, investing in oil is not for the faint of heart. In this year alone, the price per barrel of oil has been on a roller-coaster ride of Texas-sized proportions, ranging from $11 per barrel early this year to in excess of $24 last month. Underlying these fluctuations in short-run prices are a myriad of factors such as actions by OPEC and the economic problems of Asia. As a result, predicting the short-run movements of oil prices is somewhat akin to throwing darts at the market. Despite these problems, I believe the fundamentals of the industry suggest an upward trend in prices that will stimulate the domestic industry and provide handsome returns to investors who are willing to accept the accompanying risk. While the recent spurt in prices may not be sustained, long-term patterns in supply and demand bode well for this key production sector. The likelihood of rising oil prices is based to a large degree on the theory that demand for oil will outpace supply in the near future. Apart from a few short-run factors such as weather patterns, the long run demand for oil is a function of population growth, energy conservation and economic growth. Population growth increases demand in a very obvious way -- more people result in more consumption. The population of the world is expected to increase at a rate of 1.14 percent annually over the next 25 years, and grow at nearly twice that rate in some Asian countries. Energy conservation efforts may affect demand as consumers and companies respond to energy price increases by reducing their consumption (through carpooling, buying smaller cars, etc.) or by changing to alternative fuel sources. However, such dramatic behavior seems unlikely in the near future since many countries, both industrialized and developing, are critically dependent on oil at all levels of their economy. The cost of using alternative fuel sources would be prohibitive. Moreover, consumers in industrialized countries (especially America) have been observed to change their behavior very little in response to increases in the price of fuel -- especially when it comes to their transportation. (One need only observe the abundance of gas-guzzling sport utility vehicles to witness this trend in action.) Finally, since nearly all areas of the global economy depend upon oil, increases in economic growth tend to bring about corresponding increases in demand. Research shows that economic growth in developing countries will stimulate demand for oil at previously unheard-of-rates. As economic reform strengthens the Chinese economy, demand for oil should increase by 5.2 million barrels per day. By 2020 the country will have more than doubled its 1996 oil consumption. Record growth isn't just limited to Asian countries. Demand from nations such as the former Soviet Union should show similar expansion as their economies begin to improve. The exponential growth of developing economies combined with healthy projected growth for the industrialized world should lead to significant increases in worldwide oil demand over in the near future. These increases when met with only a moderate increase of supply, should in turn lead to higher oil prices. So what does this mean for the Texas economy? It is mixed news of course, but overall the outlook is bright. Profits for state oil producers would go up correspondingly with rising oil prices. Historically, U.S. producers have successfully competed against cheaper imported oil. There are some competitive challenges as refining capacity moves toward heavier foreign crude, but new technologies and cost patterns suggest that the domestic industry should fare quite well. This activity would also bring in revenue for a variety of oil-related industries in Texas. On the other hand, possible negative side effects of rising oil prices are reductions in economic development (as the cost of doing business rises) and an increase in inflation (due to higher costs for oil-dependent businesses). Nevertheless, these problems would be minimal when compared to similar problems in the seventies resulting from increased efficiency in oil usage and the inflation-curbing actions of the Federal Reserve. M. Ray Perryman is president of the Perryman Group. amcity.com