Alarming forecasts on oil prices
I'm sure everyone's looking forward to $100 for a barrel of oil. Shortly thereafter, we might think of $100 as a bargain once it hits $200.
According to oil industry analysts, this could happen within the next year.
These are not the prognostications of wild-eyed paranoid maniacs; these projections are coming from Goldman Sachs, Canadian Imperial Bank of Commerce, futures traders, and Deutsche Bank.
John Kilduff of the New York office of the futures trading firm Man Financial said: "We're only a headline of significance away from $100 oil. The unrelenting pressure of increased demand has left the market a coiled spring."
The rise over the last three years doesn't seem to be relenting anytime soon, if at all:
The cost of finding and pumping oil is rising steadily, leading analysts like Rubin and Deutsche Bank's chief energy economist, Adam Sieminski, to say that higher prices will last.
[...]
"I've gotten tired of increasing these forecasts in $5 increments," Sieminski said in an interview. "Something has happened. Costs have continued to escalate, and the geopolitical situation has gotten worse."
Oil prices could triple in three months to more than $200 a barrel, given the right circumstances, according to Matthew Simmons, chairman of Simmons, a Houston investment bank.
No one knows when the peak of oil production will occur, but when it does, sudden price shocks will become the norm.
The dynamics aren't hard to comprehend; tighter production, already strained to the maximum output that's physically possible, cannot keep up with demand. Global inventories shrink to their minimum sustainable level, so any disruption in supplies will cause prices to spike:
[Jeffrey] Currie, Goldman's global head of commodities research in London, is predicting that oil prices will probably touch a record high and stay at unprecedented levels for months or years.
[...]
"Ultimately, the key to the outlook going forward is when will Saudi Arabia ramp up production," he said in an interview. "If you have a situation in which inventories globally get drawn to critically low levels, the volatility in this market is likely to explode, which significantly increases the probability of $100 oil."
Currie's assumption, of course, is that Saudi Arabia is capable of ramping up production -- or, at least, ramping it up enough to make a difference. There's slim evidence that Saudi Arabia is capable of increasing production more than about 10 percent or so; this would only amount to about 1.2 million barrels a day beyond current production, which is tiny compared to current global demand of 84 million barrels a day. It's doubtful the Saudis could make much difference even if they wanted to.
Much of the talk about "peak oil" is unnecessarily hyped, although the underlying science is definitely valid. We will, at some point sooner rather than later, reach the end of the era of cheap oil. The oil we've been pumping out of the ground at a cost of $1 per barrel for the last century has been the easy stuff to pump -- the oil contained in aquifers just below the surface, with tremendous artesian pressure pushing the oil out of the ground. That cheap and easy oil is the stuff that's almost gone; the remaining reserves, although gargantuan and much larger than what we've already pumped, are horrifically more expensive to extract and produce.
We'll probably never run out of petroleum, but we'll certainly run out of the cheap stuff that's made our post-War economy and way of life possible. That's what the peak oil theory is all about, once you strip away all the hysterical nonsense written about it.
From that same article I linked above, there's this quote which reads like a toned-down version of a peak oil website:
A National Petroleum Council study led by a former Exxon Mobil chairman, Lee Raymond, released last week, predicted a growing gap between production and demand for oil and natural gas during the next two decades.
"There are questions about whether the oil industry can keep up with demand," Energy Secretary Samuel Bodman said last week, commenting on the council's report.
That's exactly what happens just after the peak of production has been reached; it's all downhill after that.
To be sure, extraction technologies are improving all the time, and previously abandoned fields are being revisited with newer techniques. However, even with those new techniques, the oil extracted from those fields can never cost $30 or even $50 a barrel.
Those days may be drawing to a close.