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OIL, Oil, oil …

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It’s falling. Have you noticed? It’s all about supply and demand. Global supply is up mainly because of shale oil/gas production here in America and demand is soft owing to sluggish economic growth. It looks like oil will have to get even cheaper before OPEC acts as the swing producer and cuts back production.

WTI oil reached over $110 a barrel in the summer and recently traded at $80. Gas prices have fallen 60 cents a gallon nationally since late June to $3.04 today according to AAA. I just returned from Texas where I filled up the tank for $2.99 a gallon. The chart below shows prices at $3.20 on October 15 and headed much lower if you believe the futures markets.

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Wall Street analysts have been scurrying to lower their forecasts. Goldman Sachs cut its price forecast for the first quarter to $90 a barrel and second half of 2015 to $75 a barrel.

This is pretty much unambiguously good for the US economy, but not for Alaska. Writing in the ADN on October 16, Dermot Cole said that if oil stays at its current levels “the state will be piling up annual deficits of $2 billion or more” thus exhausting state reserve funds within five or six years. That’s not counting the $50 billion Permanent Fund.

Of course the Permanent Fund was created for just this eventuality. When the oil runs out policymakers in Juneau wanted to be able to tap into a steady stream of investment earnings. That day may be here before we know it!

It’s not so different than saving for retirement as people live longer and worry more about “living too long, not dying too soon”. That’s where a diversified investment portfolio built up over time comes in just like the Permanent Fund.

By the way, on Monday the Society of Actuaries reported new mortality estimates showing that the average 65 year old woman is expected to live 88.8 years, up from 86.4 in 2000. Men age 65 are expected to live 86.6 years, up from 84.6 in 2000. If you are worried about outliving your money, you might see our APCM for Individuals Division, they can tell you.

Jeff Pantages
Chief Investment Officer

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