September 7th, 2008
Recently, people have been asking me a lot of questions about the fluctuating price of oil
“What is the price of oil going to be?” “Was the recent price spike of $147 a barrel an all-time high that we won’t see again?” And “Will the global economic slowdown drive the price of oil back down below $100?”
These are just some of the questions I have been asked in recent weeks. The reason of course, as long time regular readers of this blog know, is that I have been consistently accurate in my predictions about the price of oil. In 2006 I predicted $125 barrel oil in 2008 and $137 in 2009. In the past year I predicted that oil would have a near term trading range of $95 – 135 per barrel but that while there would be little downward pressure below $95, there are many scenarios that would provide upward pressure above $135. All of this price predictions flow from my view that we have entered the time of peak oil globally.
I still stand on that trading range prediction. Yes, the price has dropped from that $147 high of two months ago to, as of the writing of this column, $106. That is a drop of 27%. I believe that, at that peak in July, because of the lack of alternative investment options due to the sub-prime crisis, the bearish direction of the stock market and the heat in the oil futures market iself, there was a speculative trading factor of 10-15% in the price. In addition, the dollar was at or near its’ all time low against the Euro when the price hit $147.
Well, since then, the dollar has risen some 8-10% against the Euro. In addition we have learned the wonderful news that for the first time in 20 years Americans have several back to back months of year to year declines in both the amount of gasoline purchased and the number of miles driven by automobiles. The pain of $4 a gallon gasoline has changed behavior and certainly automotive buying priorities. Whether the price is $4 or drops to $3.25, people are realizing that historically high prices will now be the norm.
Most recently there has been the developing realization that the EU, and other countries are entering an economic downturn. These two recent news stories have made traders dial down their price expectations and sell their long positions, certainly at least another 5% drop in recent weeks. When you add this recent drop, combined with the removal of 10-15% speculative froth to the 8% increase in the value of the dollar, you get a spread of 23 to 28%. This explains the drop in oil prices in the last two months, not any fundamental change in the global oil reality long term.
It is important to keep the long term view when looking at oil prices. The average price per barrel in the U.S. since WWII has been around $25 a barrel. That was roughly the price in 2001 at the beginning of the new millennium and also when Bush came into office. We are now at a price that is 425% higher, down from 600% higher two months ago. Due to this historical perspective, and given my view that we are indeed entering Peak Oil, I still believe that the price range for a barrel of oil will be $95 – 135. It may dip below $95 occasionally but it could easily power through the $135 number with any combinations of hurricanes, political unrest in an oil exporting nation or news of demand continuing to outpace supply even in an economic downturn. OPEC will do what it can, officially and unofficially to keep the price from falling much below $100
We are, and will be for the foreseeable future living in a world of historically high priced oil. Until the coming revolutionary innovations in the alternative energy sector start to gain scale in the next decade we will be living in one of, if not the most expensive time of energy in humanity’s history.