Oil Price

Over the period from mid 2002 through mid 2008, global oil consumption rose steadily and
excess production capacity fell sharply. The oil price accelerated dramatically up as excess
production capacity was drawn down to extremely low levels. So, the world wound up with
an oil  price bubble and subsequent crash as global oil consumption fell sharply once worldwide
recession developed. The demand contraction drove a growing legion of financial "round trip"
players out of the market.

Oil demand stabilized in latter 2009 and rose this year. It should rise again in 2011, but perhaps
more moderately as inventories have remained at high levels after the desperate scramble for
crude in 2008. There is now a substantial cushion of excess or shut in capacity at the well head.

The cost of oil extraction has risen substantially on new production during the past decade, and
this has raised the equilibrium price of crude substantially. My number for the equilibrium price
is $58. bl. Most industry specialists would peg the price at around $70.

The oil price, which fell to a little above $30. bl. in the 2008 price crash, rose to the accepted
equilibrium price of $70. by mid 2009 on speculation demand would recover in succeeding
periods. The upward price momentum of the oil price has cooled substantially since it recovered
to $70. After all, there is now a much larger spare capacity cushion and supplies in storage
are very much higher now than in early 2008 when the accumulation scramble started.

The volatility of the oil price has toned down substantially over the past 18 months. It is
currently enjoying a counter-seasonal run up as players have jumped in to position ahead
of the normal seasonal rise in price over the winter months as gasoline stocks are built.

With oil consumption set to rise further through 2011, I am merely guessing a range for the
year of $75. - $110. bl. The current price of $89. is slightly overbought. One thing to
watch for next year is whether  the oil price uptrend is passed quickly through to gasoline
prices as has been happening recently. Such a development could lead consumers to
re-allocate budget commitments away from other consumer items.

Oil $ chart.