ON THE CONTEXT AROUND $200/BBL OIL

STICKER SHOCK

Barron's has an interview with one of the leading Oil industry analysts, Arjun Murti of Goldman Sachs (my former firm), that is worth reading, given the notable $10 jump in oil prices on Friday, nudging $140/barrel:

"IN 2004, ARJUN N. MURTI, A TOP ENERGY ANALYST AT GOLDMAN SACHS, published a report predicting "a potentially large upward spike in crude oil, natural gas and refining margins at some point this decade." It was a controversial call, with crude around $40 a barrel at the time. But it was right on the money.

Four years later, crude is trading around 139.

Murti sees energy in the later stages of a "super spike," in which prices rise to a point where demand drops off. In a note last month, he wrote that "the possibility of $150-to-$200-per-barrel oil seems increasingly likely over the next six to 24 months."

Some notable excerpts:

"(Q) Longer-term, what's driving crude to such high levels?

(A) Spare capacity throughout the energy complex seems very limited, whether for OPEC crude oil, natural gas or refining. In all of those areas, capacity is limited. And it's getting very difficult for companies and countries to boost supply -- something that became increasingly apparent to us over the first half of this decade..."

(Q) In terms of your super-spike scenario, what phase are we in?

(A) We are getting closer to the end game here, where despite eight years of rising energy prices, supply looks like it is going to barely grow this year. We have been bullish, but we didn't expect such a slow growth rate of supply. And demand outside the U.S., Europe and Japan has been more resilient than we expected."

I particularly think the way Arjun articulates his long-term view on oil prices is worth noting, especially since the mainstream media tends only to focus on the "super-spike" tops of his forecasts like $100 a few years ago, to $200 today:

"(Q) Do you see a sustained drop in demand at $200 a barrel?

(A) That is the big question. We have always assumed that, at some point, you get a sustained drop in demand. Our long-term oil forecast looking out 20 years is [for crude] to fall back to $75 a barrel, or some lower number. The questions are: How long do prices stay high? How sharply do they rise? And do people truly change their behavior or are they just temporarily driving less? It's an unknown at this point..."

"(Q) As for the possibility of $200 oil, that's not sustainable in your view, right?

(A) No, we call it a spike, which implies an upside and a downside. So we don't talk about a sustainable price of $200. We call it a peak price, but we don't know what that is. We've got a range of $150 to $200."

The whole interview is well worth reading, with a good overview of the short and long-term fundamentals.

Comments

[Alex Tolley]

The analyst is probably right that this is a spike in prices. Locally in Silicon Valley the effects of $4.50 gasoline is slightly emptier roads and some people driving their pickups and SUVs annoyingly slowly. Ridership on BART is picking up.

Economists seem to have got it wrong about the price of oil and recession - $75 oil was supposed tio be the tipping point based on the 1970's experience, but clearly that hasn't happened and I don't see the gas lines that indicate actual shortages either.

The good news is that sales of Hummers have collapsed, as have those of big SUVs whilst hybrids and other higher efficiency vehicles has taken off. I hope that lasts.

It would be truly ironic if the path of action to a more sustainable planet was triggered by real or imagined oil shortages and high oil prices.

oil should trade above $300 per barrel and gasoline price $10-$13 per gallon everybody can walk use bycicles