Oil prices?the big picture

February 20th, 2007

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In November last year, we wrote Is oil going to be more expensive?. A few months had since gone by and oil prices are still going nowhere. Last month, it even went under US$50. We guess by now, short-term traders are no longer enthusiastic on oil anymore.

As long-term investors, we must always keep our focus on the big picture. There is a growing consensus that sources from conventional oil fields are declining and that more unconventional sources of oil will have to be found and developed. This article, Future oil much harder to extract, from the mainstream newspaper, echo that view. Though the theory of Peak Oil is not mentioned in that article, it is clear that this theory forms the underlying assumption. However, not everyone believes in Peak Oil. Also, there are optimists who believe that technology will one day come to the rescue by making the extraction of oil from unconventional sources (i.e. oil sands) commercially viable. We believe that such optimism is currently premature?serious constraints still exists (see Curing oil sands fever). Then there is this idea of ?exploration paradox? where exploration is declining despite high oil prices (see Oil takeover time). Finally, there is always this wild card?Middle-East conflict.

If you are a pessimist who believes in (1) theory of Peak Oil, (2) ?exploration paradox,? (3) impracticality of oil extraction from oil sands, (4) inevitable Middle-East conflict, (5) continuous monetary inflation and (6) forthcoming ferocious oil appetite of China and India, then you will have to be bullish in the long-run price of oil and bearish on future human civilisation.

As for us, our advice is always the same: be prepared.

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