April 27th, 2008
Two years ago in this blog, I wrote a futuristic column from April 20, 2009. The title of the column was â€œRemember When Gas Was Cheap?â€ At that time I predicted that the price of oil in early 2008 would reach $125 and that in April 2009 it would be $137.
In January of 2007 I was invited on the â€œFirst Businessâ€ syndicated business program to discuss the price of oil for the remainder of the year. At the time the price was $53 a barrel. I basically told the flabbergasted reporter that I thought the price of oil would most definitely cross $80 a barrel and would approach, but not reach the $100 a barrel price. The counterbalancing view was some â€œoil industry expertâ€ who said the price range for the year would be $50-70 a barrel. Of course we know what happened.
Last fall I wrote a column predicting that the trading range for the price of oil would be $80-125 for the next two years. I now want to revise that forecast. When I made that prediction, the price has recently crossed $80, charting new territory. While obviously not surprised, I did let all the disbelief I had been subjected to in my predictions to give me a sense of caution. Since $80 was the new high, and I was saying that it would be the price floor for the foreseeable future I thought it would be a correct floor. I did say in that column that there was little on the horizon to place downward pressure on $80 but much possibility in upward pressure on $125.
I now think that the core trading price range of oil for the next 18 months will be $95 â€” 135. I seriously doubt it will ever dip below the lower price, and if it does, it will be temporary. I do however think that that there are any number of scenarios that could provoke a rapid price run up to the $150 range. What if the price of oil was converted to Euros? What if rebels in Nigeria, or terrorists in Iraq seized control or disrupted the flow of oil through their pipelines? There is no excess global refining capacity today, and many of the refineries are old and in need of repair. What if several had to be shut down for periods of time? These scenarios are all what if, and may or may not happen.
What is reality is car ownership in China and India continuing to increase by millions of vehicles per year. What is reality is that electric cars, while starting to come on the market during the next three years, will not reach any significant share of the overall number of vehicles on the road until 2013-2015. Same for hydrogen cell cars and the compressed air car. There are scattered indications that gas consumption in the U.S. has declined slightly compared to 2007, but there has yet to be a discernable trend. Instead, there is developing research that shows that Americans, with the price of gas and food rapidly escalating are cutting back on all other things.
The long term price of oil will continue to go up for many of the reasons I sited in a column two months ago. It is entirely possible that prices in the range of $150 -200 a barrel over the next 4 years will occur. We are moving through peak oil now, meaning that we have somewhere between 30-75 years of petroleum left. There will be no large scale downward pressure on the price of oil until alternative energy sources approach 50% of total energy usage. Even then, the countries that have the largest remaining reserves will want to maintain price and not diminish the value of their remaining reserves by dropping the price. This is in no way pessimism at all, it is just reality.
Since I have been living with the expectation of triple digit oil for two years I get annoyed with this constant nightly breathless drumbeat of â€œoil reached another all-time high todayâ€ every night on the news. Yeah, get used to it. I feel like I am living a dÃ©jÃ vu life, there is no other way to describe it. When one fully expects something to happen and it does, it is not a surprise.
I do think that there is some bullish speculation in the oil marketplace, but it is not much more than a single digit percentage at best. The smartest thing to do is to accept and adapt to the fact that oil will remain at current or higher prices for the next few years. This will obviously affect the price of airline tickets and any other goods or services reliant upon oil directly or indirectly. We are a society that has been constructed actually and perceptually on the premise of inexpensive energy. That is no longer the case. We must all work for energy conservation and alternative sources of energy. We must develop an understanding that habits must change, governmental policies must change and fundamental changes in the workplace must occur. If we do not become proactive on these fronts, and soon, then expect disruptions to what has been referred to as â€œthe American way of lifeâ€. The reality is leading the general perception of it, which at times feels ostrich like to me, and that puts the country at risk.