Dwight Watt Internet Article #118 8/24/2005

#118 - Oil prices (Watt Thoughts)

Article today at CNN.com on oil prices. http://money.cnn.com/2005/08/19/news/economy/merrill_oil.reut/index.htm

I am inclined t think more toward Merrill Lynch''s prediction, but I don't think it will hold that high that long. Several factors that I see could hold price up longer, but the longer the high the bigger crash I see. One is how much China imports and stores. Second is our strategic reserve which has been taking oil out of pipeline for a while now, but i understand is about full so that will free what government had been buying. Third is how quick we build new refineries, which China is doing so we could become dependent on them for refined gas and other products. We do need to be building refineries for more gas and also to have more energy efficient ones and less effect on environment. However one major problem on building refineries is NIMBY. Fourth is how fast we open up the old and new fields and other energy methods. The energy bill could have done much better on encouraging exploration and developing new sources of energy to be usable.

Last, I don't see the middle-men (people) holding price up longer as they go up on fears, but never come down, with latest fear being gas stocks falling and Katrina in US, but driving season is already ending. This article quotes 1.6% increase in American gas usage in last year. An article in the Augusta Chronicle today said gas consumption is actually down in 2005 in US by .5%. Also that energy consumption per American is same as in early 70s,but productivity is way up so conservation has been occurring. Also Americans amount (total as nation) on oil spent today versus then is double what it was in 1984, but our income (total as nation) is 3 times as high as then.

Which is why although Wal-mart says that oil prices are slowing down their expectations on sales they really are still doing good, up 10%. So although we are having to adjust for oil prices, we have to adjust other times in other ways, for instance for housing costs in some areas.

If it really is a shortage then if economy slows (which if you think back to what I was taught in college, is that if we could get to 5% unemployment basically we really have full employment. Yes some of us really are unemployed, but I still am finding small jobs and expect a full time position any day. Also the growth of GDP at 3.5% was a high rate they taught then that showed a great economy with low unemployment. Keep in mind this is the big picture and some places it is worse and some places even better) then the price of gas should fall back down as there will be plenty of it to go around.

Just remember in the early 70's everyone said we would be out of oil within 30years and we are past that point., I seem to even recall a Time cover on that in late 73 or early 74. One of reasons that OPEC gave for wanting to raise oil price 4 times as high, that they would no loner have income after 2000. Also that it was their way to get Israeli-Arab/Palestinian war settled and it is still here, but rumors of peace.

However don' expect prices to fall until national average of gas hits $2.90 or so (thereby hitting basically the magic $3 number. I realize some already see that number broken. However when prices jump 17 cents in one week is excessive leaps compared to what crude sales for and keep in mind that it is price for oil a month or two down road you see quoted daily, not for today.

Just my thoughts and guesses.



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