The fair price of oil

Oil will not run out at least in our generation. However, peak oil has come and passed. The easy oil (closer to the surface and light) is getting scarce. The heavy oil, oil from ocean and oil being trapped are more expensive to extract.

As of 6/12, the fair price of oil is $95 ($90 production cost and $5 for profit) to me and it is currently over-priced at about $100 per barrel. The long-term trend is higher due to more expensive extraction cost and supply/demand (with higher living standard in China and India and larger population). It is also due to the depreciation of USD and inflation. Hence, we need to adjust it every 6 months or so.

OPEC would like to maintain the oil price at about $100 (at today's USD) for longer-term profit. Every country within OPEC has its own agenda, political and economical issues.

However, when oil is higher than $125 for long, the alternative energies will be more feasible economically and conservation becomes more apparent. If it is run-away to $150, we'll have another recession.

Oil price has been fluctuating a lot in the last 4 years. It is purely due to speculation. The ease of money favors higher price due to inflation. QE2 plays a role, and so will be QE3 if it is not materialized. The current restrictions in speculating commodities reduce speculating on oil and could be the reason oil price drops. Retail investors should stick on fundamentals: buy low and sell high and my $85 is a good guideline (expect $95 next year). We like to eat oil traders for lunch instead the other way round!

One's opinion.

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BTW, I recommended to buy oil (OIL as a ETF) in Fool's Mountain blog when oil was $35 per barrel. If you made a killing, please send me my share of your loot. :)

Some believe all the invasions of the Middle East and recently N. Africa and the counter attacks are due to oil. We only enforced no-fly zone on countries that have oil. If so, shame on us. If it is the Crusade, shame on religions and the congress which is controlled by the Jews who drive us to wars. Would some one shed some light on it.

A related link.

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As of 12/14/12 about 6 months from last writing, I change the oil price to $90. Since the current price is $100, it is about $10 over-priced esp. when the global economy does not look good.


(c) TonyP4 2011. Written in 5/27/11. Updated in 12/14/11.

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Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.