ALL PERSPECTIVES CAN'T BE RIGHT ON OIL, GAS PRICES

Bob Tippee
Editor

Three interesting perspectives on prices of oil and natural gas are crisscrossing through the news.

They are the political perspective, the oil company perspective, and the market perspective.

According to the political perspective, as expressed in the US Congress and much of the media, prices have risen for suspicious reasons and are destined to stay high, so companies should invest their profits—also suspiciously high—in refineries and alternative energy. The investments, by the way, need to occur even as lawmakers threaten to impose "windfall profit" taxes and otherwise demonize profits.

According to the oil company perspective, current oil prices won't last. They reached recent levels in a tight market further tightened by damage from two hurricanes. Belief that the oil price trading range has risen permanently needs to be tempered by the costly failures of past such expectations to come true. It's better, in this perspective, to immunize investment economics against the nastiest imaginable price surprises. And, by the way, the demagoguery now coming from Congress just adds to the already heavy political risk discouraging refining investment in the US.

The contrast between these two perspectives is striking.

One assumes prices are permanently (and suspiciously) high and proposes permanent responses—taxes, government-owned refineries, and so on. The other assumes prices are only temporarily high and can't shake the worry that they'll tumble again as much as they have before.

Both sides can't be right. Most likely, neither one is.

Oil prices—crude, gasoline, pick a product—can't stay in the economic stratosphere. Supply in a tight market suffered a major jolt. But it's recovering.

But oil prices almost certainly won't plumb the abyss into which they fell in 1998, either. Demand gains are firmly embedded in growth economies of Asia, especially China, and India. And pivotal exporters aren't likely to leave production at near-capacity levels if prices fall much below $50/bbl.

And, oh yes, there's that third perspective: the market. The near-month futures price for crude in New York fell to a 3-month low on Nov. 2, and the gas contract fell to a 2-month low. Gasoline prices are falling, too.

Online Nov. 4, 2005; author's e-mail: bobt@ogjonline.com

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