Link

Don't Gush Over Oil

The Bush Administration has asserted that high energy prices have come from a dearth of oil and gas sources, but the facts don't back it up. Depressed prices in 1999 led to lower production of oil and gas, which squeezed supplies and raised prices. Now that production has caught up a bit, oil and gas prices have stabilized and dropped. It's the wrong time to get into the production business.

By Brian Lund (TMF Tardior) May 31, 2001

Individual investors could not be blamed for listening to Vice President Dick Cheney's speech on energy in late April and thinking the future is in oil and gas exploration and production. Amid the specter of $2-per-gallon gasoline prices and soaring natural gas prices, it seems like a no-brainer.

Think again. The Energy Information Administration (EIA) reported today that gasoline supplies increased and demand fell over the last week. (The American Petroleum Institute agreed.) That marks the eighth consecutive week supplies have increased. Meanwhile, demand hasn't risen as much as expected, certainly in part because of high prices. This year's Memorial Day weekend didn't bring the normal amount of gasoline purchases.

Huh. Gas prices have risen over the last year. Production ramped up and demand slackened, so supplies rose. What's that thing they always talked about in Economics class? Something free markets something? Could that be what's going on here? Rising energy prices over the last year were never about dwindling oil and gas sources. Producers have had wells to tap. The problem was that prices fell so low in 1998 and 1999 that production slowed to a halt, since the market was not rewarding it. The market, as markets do, adjusted its price to reflect the lack of production, and prices skyrocketed.

Now that producers have enjoyed a solid year of higher prices, however, they have increased production to satisfy demand. The price of crude has stabilized -- even fallen noticeably -- over the last six months, from $36 a barrel to today's $28. Refined gasoline supplies are up 26% and crude oil supplies are up 7% in that time.

Natural gas prices are also leveling off. Wellhead prices in the past winter, averaging $5.74 per thousand cubic feet, more than doubled the previous winter's prices. EIA data shows, however, that the price has dropped since March to an average around $5.00, and they are expected to fall to around $4.65 this spring and summer. That's still unseasonably high, but it suggests that production is beginning to adjust.

The stock market is smart enough to understand supply and demand. The stock prices of exploration and development stocks like Anadarko Petroleum NYSE: APC) and El Paso Energy (NYSE: EPG), both up around 100% last year, have dropped slightly year-to-date. Williams (NYSE: WMB) has used the bump to acquire more natural gas resources, but that won't shield it from a price decline.

This is a cyclical industry, and it's at the top of its cycle. Now is probably not the time to buy into this sector, despite the speeches in Washington.

Brian Lund does not own any of the companies mentioned in this article. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.

-- Anonymous, June 02, 2001

Answers

You don't here this everyday, do you?

-- Anonymous, June 02, 2001

I have on WTAM radio, they have been "suggesting" you fill up your car today, as the gas may be hard to get with the situations developing right now.

-- Anonymous, June 02, 2001

not hard to get, just expensive.

-- Anonymous, June 02, 2001