Reuters:

Motorists must be glad the price of fuel is one thing they do not have to worry too much about as they face the worst recession since the 1930s, but cheap fuel is not good for anyone in the long run.

Global oil prices have collapsed since July, losing two thirds of their value from a peak of almost $150 a barrel and dragging fuel costs to their lowest levels for several years.

But while low energy costs come as welcome short-term relief to consumers and companies struggling with the financial and economic crisis, longer term they can be bad for everyone.

Low energy prices squeeze investment in the oil industry, reducing future supplies. They discourage energy saving and they destabilize countries dependent on oil exports, making oil in the future more likely to be expensive and even more volatile.

"In the very short term, because we are in a recession, we could all use a low oil price," said Mike Wittner, global head of oil research at French Bank Societe Generale. "It is like a tax break, putting money back into pockets for a short time."

"But in the longer term, today’s oil price is too low to support much new supply and will slow the momentum toward alternative fuels, new technology and conservation."

My comment: Just as the cure for higher prices is higher prices the same is true for lower prices. The news everyday is filled with stories of canceled projects and lower investment in oil production. For example, check the Baker Hughes website for the amount of rotary rigs searching for natural gas in the US, it is collapsing. The existing producing fields continue to deplete everyday and if the appropriate amount of investment is not made then inevitably demand will overtake supply if the supply continues to drop. The lower price of oil and natural gas coupled with uncertainty in the economic outlook and tightening of credit are leading to less production. As always the issue is one of timing. However with all the focus on "demand destruction" and very little discussion of depletion and lack of investment I am of the view that the next time back up prices will exceed the old highs. I have no idea how long this will take but my view is that the world will not end so at some point the economy will turn around. I really like Niko Resources at these levels. They have low cost oil and natural gas production offshore India with plenty of blue sky exploration potential.

John Polomny
The Real Deal