Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Oil & Gas Price Economics -- Ignore unavailable to you. Want to Upgrade?

To: diana g who wrote (172)	12/16/1999 11:15:00 AM
From: SofaSpud	Read Replies (1) \| Respond to of 350

With respect, I believe you give them too much credit. Is it genuinely in the collective interest of the group to maintain prices where they are today? Are the global supply/demand data really good enough to fine tune the system? I don't believe so. There is a price beyond which (and over a long enough period) non-OPEC production increases to the point where it undermines the OPEC producers. I don't know today what that price is, but if I had to guess I'd say it's well below $25. Let's say we've had six months of prices high enough to promote a significant expansion of non-OPEC supply. Another six months, and then the stage is set for another down cycle, even if OPEC holds firm. Eventually each of the OPEC countries is confronted with a situation not of their own making. They see falling prices, and their production restraint in the short term will make little difference to the rate at which the prices fall. There is strong cyclicality inherent to the system, a bit like the old ag. economics model of the cobweb. That said, the length of the cycle is variable. Continued restraint might be in the best interests of the majority for a while longer. But each faces their own unique circumstances. Iraq, obviously. And the Saudis have some serious budget pressures. And Iran is presumed to have a political agenda that transcends short-term oil revenues. The quoted comments of OPEC officials in the Stratfor article imply that they can fine tune the system -- they know the supply curve and the demand curve accurately. If so, they have a source of data no one else in the world has. Remember the fiasco late '98 and early '99 with the crude oil inventory figures? Personally I hope that 2000 sees an average price over $20. That would be enough for a healthy dose of profits for the N. American industry, and repair some of the damage from the last two years. But if that happens, then the stage is really set for another downswing in '01 or '02. JMO, BWDIKA

To: diana g who wrote (172)	12/16/1999 11:35:00 AM
From: jackie	Read Replies (1) \| Respond to of 350

The observations made by the poster are good. There has been a perception down through the years of the short sided actions cited by the poster. That perception has had a lot of support in the actions of OPEC. Based on these past actions, many dismissed the latest cut backs started earlier this year. These expectations of eventual cheating were proven wrong and we saw the price of oil rise from around 10-11 to over 25. What happened? The big difference this time was two fold. First of all, the down draft in oil consumption due to the Asia flu was not as large as perceived. If my memory serves me right, the overhang in excess production was only 3%. However, the paper barrel traders in NY were able to short the price of oil with options and literally triggered a panic in selling. The rest is history. It really didn't take much of a cutback in production to get the prices rolling the other way. Secondly, all of the OPEC countries must have the income generated from the oil sales or they have serious social problems. The largest producers are countries with authoritarian rulers, the most unstable form of government. They placate the populace with goodies supplied by the petrol dollars. When they saw those revenues come down with the price of oil, they had a lot of motivation to do something. The big surprise this year was the close cooperation supplied by Mexico and Norway. These two countries were the swing producers and they wanted to go along with OPEC. All of the coordination and planning was done over emails, phone conversations, and small private meetings with the oil ministries involved. This low key approach was completely missed by the media and contributed to the surprise of a successful execution of the cutbacks. I suppose we all became accustomed to the big deal meetings of OPEC in Vienna a few years ago. The media assumed if there were no big meetings, then there were no big deals. The other advantage of the face to face meetings to the OPEC and other countries was it facilitated trust between the decision makers. It's one thing to deal with a committee; it's an entirely different matter in talking with an individual. Evidently, the personality of the Mexican minister played a big part in encouraging the others to cooperate. There was a big write up on him a couple of months ago in the NY Times. It all worked. This has encouraged the countries involved to pursue this policy of cooperation. They've seen their revenues more than double. So what does the future hold? 1 - Good environment for continued price escalation due to recovering Asian and European economies. 2 - OPEC and others have been encouraged to continue cooperation. This may include some production increases, as it is not in their interest to see oil too much higher than 25. At that point, others begin to develop their oil resources, to OPEC's detriment. That may be the innocent explanation for Iran's comments. 3 - There is only about 5 million barrels per day in excess capacity worldwide. Within the next two years world demand will exceed that capacity. Then OPEC really will have control of world oil prices. 4 - Sometime in the next five years, depletion is going to start having a major impact on productive capacity. All the talk in the world about improved technology for finding and exploiting oil reserves will do nothing to change the simple fact that oil is a finite resource. At that point, there will be talk of using the tar sands of Alberta and the oil shales here in Colorado. But the era of cheap oil will be past. Notice I said of cheap oil, not of oil. Oil will be had but at a price. We may be looking at $50 oil within five years. Of course, a major recession world wide will delay this. But it will not be cancelled. Just some thoughts. Regards, Jack Simmons