Oil Price -- Some Longer Term Thoughts

When viewed against the inflation rate for the past 40 years or so,
oil at around $60 bl. is reasonably priced. I think $50 is a better
number, but let's throw $10 bl. in to cover higher finding and
extraction costs for newer fields. When seen in this context, oil
is not a scarce or expensive commodity.

The oil price trend for the past 10 years presents a different
picture. My long term trend price range for 2009 is $38 - 79 bl.,
with $58.50 as a mid point. Of concern here is that the mid point
price represents nearly 15% annual growth from the 1999 base.
Implicit here is that oil at base has moved from a very cheap
energy source to one that is reasonably priced. That's ok, but
projection of a 15% price growth trend channel over the next 5
years would turn oil into an expensive energy source compared
to global GDP, household incomes and profits. As it turns out
oil was very expensive relative to broad economic measures for
most of the 2005 - 2008 era, and I believe, badly undercut global
growth just as it has in the past when the price spiked for more
than a month or two.

I am thinking now that oil above $70 bl would over time again cut
into growth and lead to further curtailment of oil demand down the
road barring large, dramatic improvement in fuel economies.

The history of the oil price since the late 1960s is one of stark
volatility with regular booms and busts, including the dramatic
bubble / bust from mid -2007 through the end of 2008. This sort
of kinetic volatility can be great fun for astute traders and even
nimble long term players, but it is a true destabilizing force on the
broader economic stage and should direct business and national
leaders to seek out a more assured and stable supply of energy.

I have ducked the "peak oil" debate and plan to do so for another
couple of years. It is still early to expend a lot of hot air on this
subject.

Looking forward, I will be happy to play opportunities in the oil
market so long as the price behaves itself and stays at moderate
levels. My philosophy is not to traffic on the long side with severely
overpriced assets or commodities except under rare circumstances
or in cases where volatility is easily managable, such as bonds.