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

To: marc chatman who wrote (24291)	6/17/1998 2:25:00 PM
From: Chuzzlewit	Respond to of 95453

Marc, what you are really getting at is the concept of elasticity. Rational companies are profit maximizers. That means that they want to price their product such that the profit is the greatest. But there are some problems with this analysis as applied to oil. First, a lot of oil is pumped based not on market conditions, but the needs of various governments to generate hard currency and to keep people employed. Second, oil is a finite commodity. Once it's gone it's all over. So what will determine exploration activity? I think that it will ultimately depend on two things. First, the rate at which current supplies are being depleted, and second, the marginal profit generated by additional fields. Clearly, both of these factors ultimately depend on the long term demand for petroleum. The calculus for this situation is fairly straightforward. Either you reduce the long-term supply or you increase the long-term demand. I submit that both of these factors exist with or without OPEC intervention. Since oil is finite, the supplies are being depleted. Since the human population is growing and Asia will eventually recover, the demand is growing. Therefore, oil prices will rise. When I cannot say. The joker of course is the fact that governments determine production based on non-market considerations. TTFN, CTC

To: marc chatman who wrote (24291)	6/20/1998 12:26:00 AM
From: Douglas V. Fant	Respond to of 95453

marc, The price of oil is important to the evaluation of oil prospects. Oil reserves are classified into three categories, called P1, P2, and P3, basically proven, probable, and possible, and then assigned a discounted (present worth in ground) value based upon a proposed production stream and pricing scenario. Thus as oil prices rise and fall some prospects can become and then fall out of being economical. So falling oil prices will cause prospects t be shelved for the time being and sometimes permanently (e.g., if you lose your lease or rights to drill). So in that sense the market is self correcting. Drive the price too low and companies/governments will quit developing prospects. And yes you are right- stable prices but falling demand is only 1/2 the picture. However I should note that Asia while it accounts for 1/2 of all of the world's population, it only accounts for 1/4 of the world's GNP. And not all of Asia is in bad shape economically. That is an "oblique way" of sayig I guess that most energy companies see oil/energy usage demand rising consistently intot he 21st century as numerous countries experiment with free market- based economies.... Sincerely, Doug F.