Welcome Tim.Judging by your logic we may even see it higher then...

Welcome Tim.
Judging by your logic we may even see it higher then 40c could turn into another OEX...

From ERN Premium..


Oil price is not high
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Peter Gibson
Tuesday, October 26, 2004

The media continues to describe the oil price as "high". I think it's still low. Within five years, today's price of US$53 per barrel will look like a bargain. By Peter Gibson

Oil market psychology has changed markedly this year. When the price held firm above US$30 the world was awash with dire predictions that global GDP would be cut by around 0.5% for every sustained US$10 per barrel rise.

When it held above US$40 there was surprise that consumers had accepted the increase so easily. Oil is now above US$50 and there is still little evidence of harm to consumers or economic growth.

In the face of this easy adjustment most commentators have given up spruiking a doomsday message. The real question now is how high the price can go before consumers react.

It should be noted that high oil prices hurt some consumers, notably Americans, more than others. High oil taxes mean the pump price for most European motorists has risen only 25 percent in the last year.

US motorists have been hardest hit as fuels are only lightly taxed, so the rising price of crude has a much greater influence on the pump price.

Australia's taxation level sits somewhere between the US and Europe. It's not so much the absolute price level that determines whether an economy suffers a price shock, but the size and speed of any price change. So what may be a shock for the US may merely be an inconvenience for other advanced economies.

I believe rising oil and other commodity prices will be the central theme of the next decade. This period will see continued rapid economic growth in China, India and other emerging countries, thus ensuring growing pressure on the price and availability of natural resources.

The shock for most westerners is the idea that many natural resources (not just oil) are becoming more expensive as demand growth outstrips supply growth. Once cheap, plentifully supplied and taken for granted, resources are set to move to the centre of the economic stage.

We can largely thank over one billion Chinese desperately clambering for a middle-class lifestyle. The lack of exploration and new mine development for many minerals over the last 15 years is also playing a role.

In the case of oil, there is overwhelming evidence our ability to easily increase production is deteriorating due to the accelerating rate of depletion in existing fields and the slowing rate of new discoveries.

The extent of this supply constraint is only just being understood by market commentators, and as I have stated for some years now, it will be the defining force in the oil market over the next decade.

Call it the Hubbert Curve, Peak Oil or just plain-old depletion, there is no escaping the fact that the world gets most of its oil from old fields that are past their prime. With insufficient new discoveries and developments to meet demand growth plus offset declining output from depleting fields, the world is clearly approaching a crunch-point where supply growth will fail to meet demand growth.

The only outcome of such a scenario is for the price to rise to a level that encourages new production from unconventional or high cost oil sources, as well as fuel-efficiency measures on the demand side of the equation.

The oil price probably needs to rise to around US$80 per barrel before there will be any serious impact on the global economy. This price would be roughly equivalent, in real terms, to the average price achieved during the early 1980s.

At this level consumers will have plenty of encouragement to conserve energy and to invest in alternative technologies, such as hybrid motor vehicles. This is a price at which consumers can continue to operate current technologies, albeit with some economic discomfort, while also spurring the introduction and adoption of energy-efficient technologies.

Appeals to conserve energy are laudable, but if you really want results the only solution is to make it financially worthwhile for people to change their consumption patterns.

For most of the last 60 years westerners have experienced flat or declining real prices for minerals and oil as technology has slashed production costs, our intensity of resource use has declined and as falling political risks have encouraged exploration and investment in resource-rich countries previously considered no-go zones.

But Chinese demand growth and physical constraints on resource supply have recently reversed this declining price trend. It is highly likely the current economic cycle will see sustained real price increases for many resource commodities. This will be a paradigm change for consumers and producers alike.


Cheers,
Ace.