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.
Time to join the environmental whackos and buy a hybrid?
Bear in mind that this is really about market manipulation and fears of instability if Kerry is elected. There will be a huge drop in prices if Bush is elected, since the market 'knows' what he will do. Kerry, on the other hand, is a crapshoot.
After the election, it will drop back to approximately $30 in relatively short order. This $50/bbl price is being held up by Soros and a few others. It won't last long past the election.
I agree.
but if it doesn't fall back to $40, if it stays in the mid 50s or higher, there will be a recession in 2005.
Time to build more nuke power plants
I think what is happening with oil is somewhat reminiscent of the food supply situation. From what I understand, there is more than enough food to feed the world, the problem is distribution. Oil appears to be in abundance, however, the infrastructure is not capable of meeting demand.
$40 maybe. In a market like this, even a freshman trader can't go wrong.
its being manuiplated by the DNC goons...... jezz just wait till the election is over ...... if dems win it will go down if not it will go up ....
If oil prices don't drop back we will have more stories of old people being found frozen to death in unheated apartments like back in the 70's. And as you say a deeper recession. And a series of unstable, one term presidents.
A great portion of the problem is in the fact that India and China have such rapidly growing economies. As their industries grow, the demand for energy goes up. As demand goes up, the producers sell first to the highest bidders (America, Japan, European countries) and then whatever is left over is sold to the other countries. So, as China and India demand more and more energy, we have to pay more and more to outbid them. This problem SHOULD let up a bit in the next couple of years, due to the fact that both countries are experiencing ridiculous inflation.
Oil prices may have spiked up, but they are not going to stay there long-term. Basic economic theory says that such high prices would quickly attract enormous research and development and investment in other energy sources (as well as conservation measures which are presently uneconomical). The eventual result in a few years will be a host of new sources, a glut of energy which will drive prices down far below current levels, and the demise of oil as the major source of the world's energy.
Why don't you join the ownership society, and buy oil stocks?
I get much more in dividends than I spend on gas.
Soros is manipulating the futures markets. This is hedge fund driven speculation, NOT supply and demand driven pricing.
Maybe it's time to buy a new SUV, not a hybrid!
If that is true, such a recession would start today.
$60 oil would make "heavy hybrids" an economic slam-dunk. And we would have to start building PBRs. But it's not the end of the world.
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