Posted on 10/19/2004 6:52:31 PM PDT by Truth666
NEW YORK - Yesterday, in writing about the rise in oil prices--which have roughly doubled in a year--I noted, "No one saw it coming." (See: "Oil Hits $55 Alarm; Greenspan Hits Snooze.")
As it turns out, a few people did see it. And now some of those seers are saying the recent "spike" is no spike at all, but the start of a long-term trend. It may be that the price of a barrel of oil is heading for $100, if not higher, by the end of the decade.
To be sure, the conventional wisdom is that oil prices, which fell a bit yesterday to about $53 per barrel, are going no higher and will likely fall back. That seems to be the view of Wall Street firms, most of which say as much in their research reports. Bear Stearns (nyse: BSC - news - people ), for instance, last month forecast a $25 price in 2005. Even relative "bulls" like Goldman Sachs (nyse: GS - news - people ) are talking about whether prices in the high $30 range might be sustained.
That investors as a whole see the current price jump as a blip is shown by the fact that, while prices of shares in oil companies like Exxon-Mobil (nyse: XOM - news - people ) or BP (nyse: BP - news - people ), and oil services firms, like Schlumberger (nyse: SLB - news - people ) or Transocean (nyse: RIG - news - people ) have risen, they have not risen by anything like the price of the oil they drill and sell.
"To the best of my knowledge, not once [since 1998 when oil was around $11 per barrel] has any Wall Street firm forecast oil prices to be on a yearly uptrend," says Stephen Leeb, president of Leeb Capital Management, a New York investment manager and author of The Oil Factor (Warner Business 2004). Why has Wall Street missed it so badly? Leeb suggests that the answer lies not in economics, but in mass psychology, specifically studies of social conformity.
Leeb himself is forecasting higher, indeed skyrocketing, prices. He is not part of a crowd, but he is not all alone either. He is joined by, among others, Matthew Simmons, chairman of Simmons & Company International, an energy banking firm in Houston. Simmons speaks of a phenomenon called "Peak Oil" and says it is "as inevitable as death," though, like death, predicting its precise timing is not easy. Leeb and Simmons point out that, unlike the oil crisis of the late 1970s and early 1980s, which was a political phenomenon, the current price increases are fueled by supply and demand, which are less transitory than politics.
What is the scenario in which oil hits $100 per barrel in the next five or six years?
Just as the current price increases are said to be fueled in part by rising demand from China and India, those countries will also play a large role in the long term. Leeb says that China and India now consume energy (not just oil, but all forms of power) at a per capita rate that is one half the world average. Compared to the rich nations like the U.S. and Western Europe, their per capita consumption is one-seventh as large. If these two countries become wealthy, as everyone expects they will, and merely start to consume like the rest of the world (forget about their consuming like the U.S.), that rise in demand will have a dramatic impact on world energy markets.
Leeb estimates that if China and India continue to grow, the demand for oil will rise by 6.1% per year. To meet such demand, the world would have to raise output by 43% by 2010 and to triple it in 20 years.
Is such an increase plausible? Simmons points out that, while new discoveries are certainly possible, even likely, 70% of the world's daily supply comes from fields that have been drilled for 30 years or more. Leeb adds that even Saudi Arabia, despite a stagnant economy, consumes 24% of the oil it drills. In order for it to boost production, it will have to consume a higher percentage of what it makes. As for the world's second largest oil exporter, Russia, if its economy weren't a basket case, it might be using its entire output internally.
Leeb says that during the last oil crisis, the world was producing at 70% capacity. Now it's at 99%. Because there is no slack in the system, every time there is a trial in Russia, a strike in Venezuela, a hurricane off Louisiana or a surge in violence in the Middle East, the oil markets react dramatically. The good news is that we are more efficient than in the 1980s, and we spend a much smaller share of gross domestic product on energy. But while demand may slack off short term due to slower growth, the longer term is troubling regardless of new production technology or far better conservation.
Where have we heard this before? In the 1970s and 1980s, some prognosticators spoke about the world "running out of oil." That prospect is not what drives the current fears. It is the apparently inevitable supply-and-demand driven market movements that may force the price of oil to $100. And that's a lot scarier.
Interesting analysis. Makes me wonder how bad it may get.
As I've thought before, the cheapie purchases from and outsourcing jobs to China and India now begin to cost us something. "Chickens come home to roost"?
It's interesting that the factor "rising demand by cheap labor countries (China, India, etc)" never got nor will get the chance to become the factor driving oil prices ...
...since now, as that could finally become a factor, we just crossed the peak oil point, signaling that we now entered the final phase ...
Soros at work. All of this is being driven by heavy futures and forwards speculation.
So, any question who is behind this???
... with prices being driven mainly by the depletion factor
Interesting.
I wouldn't worry about the cost of operating your car as much as I would worry about the cost of heating your home. That could become a life or death situation if oil prices "go to the moon".
Look on the bright side, Iraq is increasing its oil revenues significantly. These monies are placed in the Reconstruction Fund so, in a sense, the world is helping Iraq to rebuild whether they like it or not.
666-the father of lies!
If they don't sink us at the ballot box they'll bomb us in our gas tanks, fellas. Congress otta pass a bill for drilling ASAP. (Devil take the hindmost).
I know what you mean. I recall in 1998 you could find headlines that implied that the price of oil was going to go to $0.
I have no proof where the price of oil is going, but my general sense if that if it's due to increased demand from India and China because of expansion then the higher price will put a damper on that expansion.
But until then shocking headlines are the order of business.
Nah - I always liked horses better anyway. The world was more peaceful with horses, and you could use their byproduct in your veggie garden, too.
Soros is just like the brothers in Trading places. I hope he loses his ass.
Finally, some common sense and numbers...thanks
But it seems that the problem is not only arithmetics but also LOGIC.
So let's perform again some basic arithmetics to check the logic of Wall Street, OPEC & Co.
the SPR increased 4 million barrels in one week = the world output of just over ONE hour time.
---> OPEC tells the US to tap the SPR
---> oil prices slide 10%
---> Wall Street sends the Dow to 10,000
Now, none of this is strange for people that realised what times are we living in.
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