PERFORMANCE ANNOUNCEMENT

As Of: October 25, 2007

OIL

The price bubbles up

   After more than doubling in price during the previous several years, oil finished 2006 at a price just above $60 per barrel. In January 2007, the price drifted back down to $50 per barrel. For the balance of this year oil has climbed to more than $90 per barrel. We were told the price was going up due to the threat of hurricanes. The hurricanes never came. We were told the price was going up because Iran would probably use oil as an economic weapon against us. So far, Iran has had no appreciable effect on supplies. We were told the price was going up due to possible supply disruptions from Nigeria and Venezuela, etc. etc. The fact is that supplies have remained adequate, and there have been no significant delivery disruptions in any segment of the energy markets in the United States. In spite of increased demand from China and the rest of the world, and in spite of high refinery utilization, there still seems to be adequate supply.

   One has to conclude that the price has gone up for the same reason that Starbucks can charge three or four dollars for a cup of coffee: because people are willing to pay it. Fear started the process with oil. Going all the way back to the start of the war on terror and the invasion of Iraq, there has been a fear that supplies would be inadequate. However, once the price rise started, there has been no reason for it to stop as long as people are willing to pay the higher prices and demand has not been curtailed. There is every reason to expect that prices will continue to rise (although not in a straight line) until consumers finally start to push back and exercise some conservation. It is unclear whether this will happen as a direct response to the price of oil, or whether an economic downturn will cause a general lack of spending by consumers. Either way, the price of oil will not go down (much) due to adequate or excess supply, just as the price of Starbucks coffee will not go down because there is plenty of coffee available to meet demand. The price will only go down when consumers revolt and conservation starts to reduce demand. There is no sign of that happening yet, but probably somewhere between $90 and $120 per barrel we will see people start to rethink their use of energy.