Oil patch veteran Jim Gray offers wisdom on crude collapse

Jim Gray got his first job in the oil patch in 1956, when oil was trading somewhere south of $5 a barrel.

Trained as a geologist, Gray founded Canadian Hunter Exploration in 1973 and built it into one of Canada's largest natural gas companies.

He's lived through a few of these boom andbust cycles, enough of them to have some perspective on the current collapse.

With nearly 60 years of experience, here are five things Jim Gray sees unfolding in the energy sector right now.

Rational versus irrational drops in oil prices

Gray says that when oildrops precipitously, as it has done, half the drop is rational and half the drop is irrational.

"We started last June at $105, down to $65 or $60 was rational, there was new oil coming on from Libya and Nigeria, from then on theres been a knee jerk or irrational fall."

Gray doesn't know if oil has hit bottom, but says once it has happened, oil willbounce around at the bottom for six or eight8 months, but the irrational part of the dropwill recover very quickly, meaning it will climb to the $60 or $65 range.

This drop wasn't all about Saudi Arabia

"We consume about 92 million barrels of oil every day," says Gray. "Once the supply and demand gets a little out of whack, it just takes one, or two, or threemillion barrels more supply and you've got a crisis."

Gray says thatbetween Libya and Nigeria, they brought onabout a million barrel last spring, and that was the trigger.

However,Saudi Arabia and Russiaare both hurting

Gray says that, in his opinion, oil cannotstay down for an extended period of time.

"Russia is in thetank, theyre losing $500 million a day, they have 17% interest rates," says Gray. "Their bonds are junk bonds."

"Saudi Arabia is going through money, $500 million dollars a day, thats $170 billion a year. Mexico and Venezuela are suffering. With all those countries suffering, it's a proxy forpolitical instability."

There will be opportunities on the bounce

The best way for an energy company to get through this is to have a strong balance sheet now and cash later.

"Theres going to be money made on the bounce," says Gray. "So keep your balance sheetfree, have someopportunisticmoney and keepyour core skills in place."

A little pain is probably good for Alberta

Both the provincial government and many individualAlbertans are feeling a little over extended right now. Gray says that's a hard, but important lesson to learn.

"For those people whobought big houses or leveraged their personal wealth, I bet that lots of those young people will look back in 20 years and say the life experience they got from this wasthe best theyve ever had."

"Weve had chequebook public policy in this province and with a lot of our people for too long and this cold shower that were having is not all bad."