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New Price Peak by Next Year

Posted by Jeff Rubin on March 31st, 2010 under SmallerWorldTags: , , , , ,  • 19 Comments

What does $80-per-barrel oil say to you?

Three years ago, it would have told you that global oil markets were at record tightness. Back then, the US president was making a personal pilgrimage to Saudi Arabia to vainly plead for more production. And economists were worrying about the implications for global economic growth.

Today, it seems the goalposts have suddenly moved. After filling up on $4-per-gallon gasoline only two Memorial Day weekends ago, today’s $2.20-per-gallon average gasoline price doesn’t seem so expensive to American motorists anymore.

And suddenly, $80-per-barrel oil is no longer seen by the Saudis as threatening global oil demand, but is instead viewed as a minimum price for their nation to invest in new supply. And as far as my fellow economists are concerned, we’ve heard not even a peep from them about what these types of oil prices may mean for the global economy in the days ahead.

But how much longer can the world pretend that it won’t soon be facing another energy shock, one every bit as challenging as the one it met two years ago? Does anyone still believe the reassuring forecasts from discredited feel-good organizations like the International Energy Agency about new sources of cheap supply, like those that once flowed from places like Prudhoe Bay in Alaska or the North Sea? If so, where is that supply of new affordable oil coming from? Surely not from tar sands or from ultra-deep water fields six miles below the ocean’s floor.

And what will suddenly put the brakes on world demand over the next year that will pull oil prices back from the precipice of triple-digit range? Are car sales about to tank in China and India over the coming months, suddenly halting the otherwise insatiable demand from these countries for more oil? Will OPEC suddenly start charging its drivers and its utilities world oil prices and halt the explosive demand growth in their own economies for the very oil they are supposed to supply to the rest of the world?

Whether we are talking about supply or demand, there is nothing on the horizon to prevent the imminent return of the very same oil prices that put us into the deepest postwar recession yet in the first place.

By the fourth quarter of this year, oil prices will be back in triple-digit range, and by next year oil prices will rise to record highs, taking out the high-water mark of $147 per barrel that was set back before the recession began in 2008.

We’re barely out of the recession, and already we face prices that, just a few years ago, our government, our oil industry and our economists told us we would never see.

Where do you think oil prices will be trading in the future?

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  • BR

    Jeff -

    Do you think there's a chance that the economic recovery will be so sluggish that oil prices won't even be able to get up to $100 per barrel?

    For the past 6 months the price of oil has stayed within a pretty narrow band (around $65-$82 or so) because each time it rallies, new economic concerns drive it down again.

  • scaledownjames

    Oil prices are relative. US $100 oil bought with a Canadian dollar worth US$1.20 would still be $80/bbl.
    If the US “recovery” craps out and there is another leg down and they have nothing left to back their dollar except their word and/or military force what then. Fewer imported barrels of oil and higher local prices but, more oil for other nations.
    While I agree that the value of oil and energy will appreciate I'm not so sure we will see it expressed in dollars paid but, in a world wide depression and economic reset the value will be who has the energy and how they choose to distribute it. The bidding for oil may reach $1000/bbl but if your nation is bankrupt and dependent on imported energy what will matter most is if anyone will sell to you.

  • Bob

    Jeff,

    Stephen Schork has been pointing to the drop in Vehicle Miles Travelled in the US (1.6% drop year of year in January) arguing that gasoline demand in the US has “peaked”. He also argues that continued difficulty refiners are having making money at $80 oil shows that prices cannot go higher with demand dropping further (and dramatically).

    Can demand from Asia truly overcome these hurdles to large oil price increases?

    Thanks,

    Bob

  • Ray

    I wish gas was $2.20.

    Underestimated is the tremendous power of our current socialist government. If crude oil even approaches $100, the bullets will be flying at the socialist administration and they will see 2012 disappearing. Their narcissistic egos will not allow it. Yes, they want us all riding bicycles why they jet around, but they won't endanger their rule. $150 a barrel? Talk to me in 5 years…maybe.

  • Bob

    Thanks Ray. Could you say that again in English?

  • Laurent H

    The comments are interesting. They mostly focus on USA. But is the US, the place we need to look at to forecast the future oil price?

    The oil traders use the same biased lenses because they mostly learned their job in the US.

    It may be tough to acknowledge, but USA may soon not be at the center of the planet oil anymore. There is a new world out there. When we were in the middle of the crises, China and India signed long terms exclusivity with many oil producers leaving us with… less oil. Scary but very exciting!

    I fully agree with Jeff, it smells we are going to the triple-digit range.

  • barryfrancis

    Hi Jeff,

    What effect will there be if Iraq has all the oil that they say they have. This could be a game changer for the next decade. Maybe drive the price of oil down to $60 a barrel for the next 10 years.

  • chistletoe

    The evidence for peak oil, actually a double peak in 2003 and 2008,
    is a whole lot stronger than the evidence for global warming.
    And a whole lot more disturbing.

    by now, it should be becoming clear even to the board of governors of the Federal Reserve
    that no matter how much money they print,
    it will still not create more oil.

    be wary, however.
    those same governors, having failed to solve the problem with one approach,
    may think that reversing their course and raising interest rates to the sky
    will solve it. And, in a way, it would …

  • Randy MacDonald

    The sudden newsworthiness of a coming onslaught of electric cars has me wondering if, at some tipping point, we'll actually see them pose a threat to oil producers and start to cause a global shift in the sources of energy that we consume.

  • Marvin Wong

    Jeff,

    What's your take on the implication of the very recent spectacularly significant development in the supply of shale gas in North America on global oil supply. I understand that it does not require a lot of modification to a vehicle to convert it to natural gas fuelled. If I remember correctly, about as long as two decades ago in Canada, some people retrofitted their cars to be natural gas fuelled, it cost about $500 Canadian per car for the retrofitting, and it worked fine without any technical problem. The trend never caught on as gasoline prices went down to a compatitive level with natural gas later on.
    From that perspective, it appears that for North American vehicles to convert the fuel from gasoline to natural gas can quite easily achieved within quite a brief period of time, for example, a couple of years. I don't think it is that difficult to establish a network of natural gas fuel stations within a couple of years either. Based on the above premise, even if only 30% of all North American cars are converted to natural gas powered, it can significantly dampen the demand for oil, thereby preventing oil prices from rising to prohibitive levels. What's your view on this?

    Marv

  • dartstar

    do you see obama understanding this and has decided to try opening up offshore drilling around the united states? it seems like such a short term solution anyway you look at it.

  • Dennis

    For the last few weeks, oil seems to have disengaged from the american dollar. Oil is no longer going up when the dollar goes down and visa versa.

    Is it possible that oil is not being used as much as a currency, and is moving simply on demand/supply.

    There seems to be a lot of support for oil at $ 80.00, no matter which direction the american dollar goes.

  • denco43

    For the last few weeks oil seems to have disengaged with the american dollar. It no longer goes down when the dollar goes up and vise versa.

    Might this be a sign that oil is no longer being used so much as a currency, but rather is reacting simply to supply and demand.

    There seems to be a lot of support for oil at $ 80.00, no matter what direction the american dollar goes.

    Any thoughts ?

  • jlow232

    What do you think of using sugar based ethanol? Would this help? Detroit is producing many flex fuel vehicles. Isn't this an alternative.. Liked your book.

  • GA Browne

    Mr Rubin,
    It is apparent that the world could very well move past the USA as the dominant consuming nation. I believe we are seeing the USA being relegated to a diminished presence as world trade uses online currency transactions to remove the USA dollar as the dominant currency.
    There is no need to have the USA act as the world central banker. I believe that currency markets will become the new central banks of a world trade.

  • Skepic

    CIBC WM sees oil prices doubling in next five years
    Pressure will come from global crude demand, depletion of supply
    Thursday, April 14, 2005
    By James Langton
    CIBC World Markets doubts the recent easing in oil prices. In a new report, it predicts that crude prices willalmost double over the next five years. And, energy stocks will dominate equity markets much as techs did in the late 1990s.In a new report, it suggests that crude prices will almost double, averaging close to $77/barrel and reaching asmuch as $100/barrel by 2010. “That’s over twice the previous 6-year high (1980-1985) following the second OPEC oil shock, when crude, in today’s dollars, averaged the equivalent of $65/barrel,” it reports.

    Really?

  • Cinquero

    I have some problems with such discussions.

    1.) Where is the economic value in 80$+ oil?
    2.) Income in Asia still lags American income by a rather large margin. How is that supposed to support high oil prices when the US consumer is out of equity?
    3.) Oil demand elasticity is larger on longer time scales.
    4.) Political impact? The world has acknowledged by now that the age of oil is going to end. Look back at the beginning of the 70s: everyone believed millions will gonna die because of an output gap in agriculture. Did it happen? There are so much untapped alternatives one usually is not able to understand a priori (otherwise Chinese und Russian governments wouldn't have had to replace their planned economies with some sort of a free market). Look at Warren Buffet: rail transport is SO MUCH more efficient and does not need energy storage with high density. My best guess is that electric cars will be primarily used in public transport systems.
    5.) The developing nations won't go through the development stages the US and many western nations have gone through. They will use top notch tech from the start. They cannot afford to burn 80$ oil if the US already uses more efficient replacements — otherwise they would just lag behind in a global economy. How is a Chinese worker to compete with US workers if even US workers had a problem with 140 US$ oil?

    Of course, I'm not seeing that much action in public positions beyond Buffet buying railways. The slow transition in the auto segment seems to suggest that we really will face more shortages down the road if we don't force change…

  • commandola

    Jeff, are you there?

    I'm also interested in knowing where energy stocks are going. Although most of us ask Jeff our questions, I don't see him replying to any. I'll take my chance any way.

    Jeff: If energy stocks come to dominate equity markets, it doesn't really mean much for investors, does it? Won't high share prices only reflect higher costs in producing oil? What kind of returns can investors expect once oil reaches the triple-digit range?

  • commandola

    Jeff, are you there?

    I'm also interested in knowing where energy stocks are going. Although most of us ask Jeff our questions, I don't see him replying to any. I'll take my chance any way.

    Jeff: If energy stocks come to dominate equity markets, it doesn't really mean much for investors, does it? Won't high share prices only reflect higher costs in producing oil? What kind of returns can investors expect once oil reaches the triple-digit range?

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