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Pastimes : G&K Investing for Curmudgeons -- Ignore unavailable to you. Want to Upgrade?

To: JohnG who wrote (8796)	11/26/2000 11:38:20 AM
From: Dr. Id	Respond to of 22706

<edit> (this was a response to a very humorous JohnG post with the realization that I could not come close to matching his incredible wit). Dr.Id@defeatedatlastbyareallyfunnyguy.com

To: JohnG who wrote (8796)	11/26/2000 6:13:21 PM
From: Tom Pulley	Respond to of 22706

John, re your statement "If you believe high energy prices can sink the economy, you better be real worried. In 5 to 12 months, these high spot prices will replace the much lower contract prices for gas." The situation may not be quite so bad as you might think. OPEC initiated efforts to increase oil production last summer, however it takes time for the wells and production facilities to be stepped up, for the tankers to get the oil here, and for the refineries to process the oil. We are just now beginning to see the increase in supply. Oil prices appear to be stabilizing in the $25-$40 range. This significant increase in price versus the range for the last 15 years of $12-$24 is spurring a large increase in drilling which will increase production to keep up with demand. In Economics we were taught about the supply/demand curve. I think this theory holds for oil over a 12-24 month period. I've heard many people talk about the oil shortage of the 1970's, but what many people don't consider is that oil and natural gas prices were regulated at that time. So at the same time as we were facing OPEC production reductions the U.S. was gradually going from a regulated to a deregulated pricing environment. For many years now though, oil and natural gas prices have been totally deregulated, so I believe the market will provide for supply to meet demand with the type of price increases we have seen. Also I might mention the concern about the marginal wells not being able to be brought back on production due to problems incurred while shut-in due to low prices, I personally believe this is BS for the most part and this is not a significant volume. In fact, if anyone out there has a few of those wells that were shut-in at $12 and won't flow now, I would be glad to take them off their hands. Natural gas prices are a bigger concern as natural gas demand is growing very rapidly and it cannot be imported from giant fields in foreign countries as easily as oil. However, many power plants and industries can switch from using natural gas as fuel to using oil. Also, natural gas can imported in the form of LNG (liquified natural gas), it is just a bit more expensive. Historically, natural gas has averaged around 10 times the price of oil due to the ability to substitute. Assuming that relationship, oil at $35 per barrel would result in natural gas at $3.50/Mcf (versus $6.00/Mcf today). So with all that said, oil and gas may go a bit higher for a couple months if the weather is cold and demand is extra high, but my belief is the average prices in 2001 will not be significantly higher than 2000. If correct, inflation worries should subside soon, the Fed should start easing within a few months, and if history is a guide the market will be heading higher again. Tom