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12 January 2009

Oil Prices

I was just watching an interview on Bloomberg where the guest was talking about oil prices. He said that oil should be trading in the $65 range to be "normal". I've heard that a lot lately with prices ranging from $60 to $75 as the "normal range" price need to trade for oil companies to make money.

Personally, I can't believe that oil needs to trade that high for oil companies to make money. Just a few short years ago, the world cringed at the thought of oil trading at $50. Everyone thought that would be the apocalypse and the economy would head into a tailspin.

Now, it's normal.

What changed so dramatically that oil companies can't make money at $20 per barrel anymore? It traded there for decades and oil companies made billions. It still costs around $2 per barrel to extract from the ground. Other expenses can't have gone up that much. Sure, exploration costs are high and we need to find more oil, but there are already known sources that we just haven't tapped yet. And there are other technologies that we haven't used to their potential yet.

So why is it becoming acceptable for oil to trade between $60 and $75 per barrel? Maybe there just isn't as much oil in the ground as governments would have us believe and the markets are taking this into consideration.

There have been many studies that said we would reach peak oil in the 70's, then it got pushed back a decade or two. But maybe we've passed it and prices are beginning to reflect that. If so, prices will make new record highs. Prices in the low 30's may be an excellent buying point. That is coming soon and it may not get any lower than that.

On the other hand, if you are a contrarian, you might think that since most analysts are talking about oil trading normally in the $60 to $75 range then lower prices could occur.

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