Monday, December 22, 2008

Long term outlook for oil prices

Oil prices have dropped to under $34 a barrel despite OPEC's announcement of the large single output cut ever last week. There is talk of prices dropping further to $25. This may seem terrific news in a slowing global economy but it has unwelcome long-term implications. It could derail plans for oil exploration and it also constitutes a huge setback to the quest for alternative fuels. Too low prices for oil are as bad as too high prices.

But I have to wonder: where are the geniuses who forecast ever-climbing oil prices just a few months ago? Arjun Murty, the Goldman Sachs wonder-kid, was said to have forecast an oil price spike of $200. Other said that climbing oil prices merely reflected an emerging scarcity of a limited resource. I was among the few who said that the sharp rise in oil prices appeared speculative and that prices should drop below $100 before the end of the year.

Now, is the fall in oil prices temporary? Should we see soaring oil prices once global growth beccomes normal. The World Bank doesn't think so. Here is what the latest Global Economic Prospects report says:

The strength, breadth (in terms of the number of commodities whose prices have increased), and duration of the current commodity boom have prompted speculation that the global economy is moving into a new era characterized by relative shortage and permanently higher (and even permanently rising) commodity prices. This outcome does not appear likely. Over the next two decades, slower population growth and weaker (though still strong) income growth are projected to cause trend global GDP growth to ease …. and, with it, the demand for commodities.

Although the absolute quantity of fossil fuels and metals in the earth’s crust is declining and the quantity that is extracted each
year is rising, there appears little likelihood that the world will run out anytime soon. Historically, proven reserves of both metals and oil have tended to rise even more rapidly than production, remaining surprisingly constant in the case of oil at about 40 years of production.


2jaipm said...

There are a few people who have been showered luck to FOOL around with Analysis & People:

Arjun Murti’s back, and he sees a bottom in crude

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Anonymous said...

No matter what the price of oil is, there will always be some greedy person or outfit who will find someway to gouge the public. That is why gas prices will always stay high. The sad thing about this is the politicans will set on their butt and let it happen. the next election will cure that if the public has guts enough to throw the present bunch out.

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