Goldman says oil ‘likely’ to hit $150-$200 by 2010
Goldman Sachs’ Arjun N. Murti said this in a May 5 report:
The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.
That would mean gasoline prices of $5 to $6 a gallon. Unless, of course, we permanently suspend the gasoline tax, in which case gasoline prices would only be $5 to $6 a gallon.
Why should we listen to Murti? Well, back in 2005, when prices averaged under $60 a barrel, he was one of the few Wall Street analysts who predicted oil could soon hit $105 a barrel — or higher if we don’t take the right actions quickly:
There will be a peak in production earlier than expected, and that post-peak decline will be more dramatic than currently assumed unless there is a sustained increase in investment in oil and gas production, greater consumer efficiency and alternative energy.
That may all seem obvious, but it has come as a big shock to Detroit, D.C. policymakers, truckers, and apparently most of the American public. Certainly the fundamentals of oil supply and demand have changed, probably forever, as I have repeatedly written. And as Bloomberg reports, Murti is not alone:
Deutsche Bank AG Chief Energy Economist Adam Sieminski, who forecasts oil averaging $102.50 next year, today said Asian demand and limited extra supply will keep pushing oil to record levels. There’s a “huge risk” that prices will rise to a level, perhaps $200, “when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,” Sieminski said in an April 25 report.
I tend to agree that the price is likely to keep rising over time (with occasional dips) until there is serious demand instruction. Most people, including me, thought that would have happened by now. But obviously prices are going to have to go considerably higher. Key factors include:
China, the world’s fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade’s low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East …
In Venezuela, production has slumped to about 2.34 million barrels a day from almost 3 million barrels a day in 2002, according to Bloomberg’s estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.
Iraq’s oil production has yet to reach levels attained before the U.S.-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.
Mexico’s production has fallen below 3 million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30 percent drop at Cantarell, its largest field, which accounts for 40 percent of output.
And, of course, Russia may have seen peak production (as the Financial Times wrote recently):
Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s largest independent oil company, told the Financial Times he believed last year’s Russian oil production of about 10m barrels a day was the highest he would see “in his lifetime.” Russia is the world’s second biggest oil producer.
Mr. Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically, saying that in the oil-rich region of western Siberia, the mainstay of Russian output, “the period of intense oil production [growth] is over.”
But what about OPEC?
Spare production capacity of the Organization of Petroleum Exporting Countries is low and the group’s exports may fall because of “lackluster” supply growth and rising domestic consumption in member countries, the Goldman analysts said.
Goldman’s bottom line is not pretty:
“The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth” is leading to higher prices, the analysts said. That could result in a “sharp correction in oil demand.”
And, by the way, don’t blame speculators:
There’s a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said. “Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator.”
Commodity investors, the Goldman analysts wrote, are “helping to solve the energy crisis” by speeding up the process for oil companies to spend more on energy projects and at the same time encourage efficiency.
I agree. Anybody who is helping to forward price the coming peak in conventional oil production is doing all of us a favor.