Discussions on Oil

I've been having an interesting email discussion with Matt Trivisonno about some energy issues. What started it was our prior discussion on Why is Oil Dropping (and what might its impact be)?

Matt is more bullish than I (to say the least). I found his 20 points as to how and why Oil prices have been all over the place interesting; consider it a bit of counterprogramming.

Here's Matt's 20 point chrononlogy:

1. Oil is cheap in 2002, there is no investment, oil infrastructure decays

2. Everybody "knows" oil is an inherently cheap commodity

3. Oil producers fail to forecast robust global growth and oil demand

4. Prices rise as market signals its needs to producers

5. Oil execs still reluctant after being burned in the last bust

6. Prices rise more as global growth continues

7. Oil companies begin to invest, but increasing supply takes years

8. Oil prices rise some more

9. Oil companies are now scrambling to meet demand

10. SUVs still selling as drivers expect gasoline prices to fall after Katrina

11. Speculation picks up

12. The new boom induces oil-investing mania

13. Everybody "knows" that oil always goes up

14. Capitalism works after all, and supply finally meets demand in 2006

15. But the speculation-turbo-charged price of oil induces a demand shift

16. Drivers capitulate and switch from Detroit SUVs to Toyotas

17. The demise of the Hummer H1 in June marks the top of oil prices

18. The huge oil inventory built up by speculators cascades onto the market

19. Prices plunge as the economy signals "that's enough" to producers

20. Lower energy costs feed back into continued global growth

I have 4 primary differences with Matt:

1. Notably missing is the impact of the Fed cutting rates to half century lows, and how that impacts any dollar denominated commodity (oil, gold, real estate, etc). I believe that was quite a significant event;

2. What? No terror premium?

3. The switching process from SUVs to more fuel efficient vehicles takes much longer, as drivers are stuck in leases, ownership, etc.

4. Oil only goes up? I thought it was Real Estate that only went up!

Anyway, its a thought provoking scenario regardless . . .

Thanks, Matt!

Sources:
Will OPEC Collapse in 2006 Like it Did in 1986?
Matt Trivisonno
Techsono, September 30, 2006

Demise of the Hummer
Phil Erlanger
Minayanville, Aug 09, 2006 12:52 pm

Pain From '80s Factors Into Oil Now
James J. Cramer
RealMoney.com, 3/17/2005 11:21 AM EST