Contrary to conventional wisdom, the history of crude oil prices has been one of volatile swings. Natural gas prices, somewhat more stable, have nevertheless undergone large percentage changes from year to year. Such abrupt changes have caused fluctuations in cash flow and have necessitated the cycles of expenditure evident in the past.

In good times the petroleum industry reinvests almost all of its revenue in finding, developing, and producing oil and gas fields. The reinvestment percentage logically shrinks in poorer times. For exploration alone, the reinvestment rate has averaged 25% since 1944.

Gas discoveries are dominant in new discoveries, and revenue from gas fields is rising as a percent of total wellhead revenue. However, more than half of all revenue is still from oil fields. Revenue is the dominant factor affecting activity. Thus, the ability to forecast future prices determines the ability of the industry to foresee its future.

The petroleum industry's myopic record shows a lack of prescience in the ability to divine future price levels. Any forecast of future activity is limited to the accuracy of the assumptions about revenue.

Given these major uncertainties, a series of forecasts based on several scenarios appears prudent.

End_of_Article - Last_Page 506------------