Crude oil falls, but maybe not for long

Economists, analysts concerned lack of exploration, production investment will spur unprecedented price hike when economy recovers

Kay Cashman

Petroleum News

Resurgent economic jitters sent benchmark oil prices below $38 a barrel Dec. 31, as investors focused on the global slowdown that has dragged crude markets down some 60 percent this year, from a high of $147 in July.

While oil prices are expected to continue falling in the short term, over the medium to long term economic recovery is anticipated to increase demand, and prices are expected to recover as energy markets tighten.

That’s when things are likely to get “nasty,” Petroleum News’ favorite oil price guru, Roger Herrera, predicts.

“I remain convinced that world oil production is close to its peak,” Herrera told Petroleum News recently. “However, the latest world economic crisis can only obscure or prolong that inevitability. A downturn in world economic growth, which appears to be a fact we can look forward to, will reduce demand for oil and significantly reduce investment in the search for new oil.”

The first factor, he said, “means that supply and demand for oil will probably stay in balance for the time it takes the world to get out of recession. During that period — a year or three? — the price of oil is not likely to move significantly unless OPEC intervenes.

“Personally, I think most OPEC countries are too self interested in cheating to allow the cartel to control prices,” Herrera said.

“So, believing as I do that oil is too cheap at $60 per barrel, or thereabouts, we can thank our lucky stars if that approximate price prevails for the next few years.

“Thereafter, things could turn nasty. Little or no new investment in big projects to find new oil for two or three years would be a disaster for our future. We are already learning that new tar sands are not economic at $60. Even the major offshore Brazilian finds may be delayed in their development at that price, and it is now apparent that relatively easy oil, if there is any left, costs about that amount to find and produce,” he said.

“So when our economic funk dissipates in a few years and we want to increase production of world oil to fuel the new growth, we will probably find that there is no extra oil available. No new investment means no new oil, so we will experience an artificially induced peak of production prior to the geological peak of oil.”

It really doesn’t matter which is responsible, Herrera said. The end result will be the same: “The price will go up.”

In the meantime, he said, “we can expect no help from our new president or Congress who are collectively incapable of finding a single barrel of oil. Their inclination, if not intent, is to add taxes on the oil industry. That will make our energy future dark and cold indeed.”

Herrera said that “one problem with the past is that we coped with oil at $145 per barrel. It was greed, not just the price of oil that led to our present economic problems. Thus when economic growth inevitably begins again and the competition for oil energy heats up, it will be psychologically OK for it to rush up to $140-plus per barrel without too much concern.”

That, plus the factor of insufficient supply, he said, “could easily see oil over $200 in the next three or four years. Not a pleasant thought, but one we should be planning for by actively encouraging oil company exploration and development actions now.”

According to a Dec. 29 Cutting Edge News report, Nobuo Tanaka, the head of the International Energy Agency, or IEA, said in late December that the energy industry might be setting the stage for yet another supply-and-demand train wreck down the road: “We’re concerned that supply won’t catch up with demand after this crisis.” He added that “the supply crunch may come again, but in a more acute way.”

2009 predictions run the gamut

Worse, some of the leaders of the countries producing the most oil, such as Venezuela President Hugo Chavez, continue to use oil as a geopolitical tool.

So what are economists and analysts in the public and private sectors predicting for 2009 and beyond?

Here’s the latest (Herrera has never been wrong, knock on wood):

Vienna’s JBC Energy thinks prices are close to bottoming out, predicting that crude will increase gradually to average at $74.75 a barrel in 2009.

“This is mainly due to OPEC cuts, which should result in large stockdraws in the first half of the year,” said JBC’s late December research note. “Lower supplies from Russia will also contribute to this trend and global demand should start recovering towards the end of the year, especially in Asian economies.”

The most negative price prediction for the near term comes from Adam Sieminski, the chief energy economist of Deutsche Bank, who predicts oil prices could hit a low of $30 a barrel in 2009, and forecasts an average 2009 price of $47.50.

Sieminski said that other forecasts underestimate how much the global downturn could reduce the demand for oil.

Citigroup is predicting an average of $65 per barrel in 2009.

Barclays Capital is forecasting $76, although it said there was a greater risk that prices would undershoot rather than exceed this figure.

Dresdner Kleinwort predicts $84.50.

The Energy Information Administration, or EIA, of the U.S. Department of Energy predicts $51 a barrel in 2009.

According to a later December report by GigaOm, Paul Stevens, a professor at the UK’s Royal Institute of International Affairs, said in 2009, “We will see continued price weakness in first half or quarter of year. A lot depends on demand and that depends on the nature and depth of the economic recession …If demand does not completely collapse, my guess is that as we move through 2009, as OPEC’s determination to defend its price bears up, then prices will creep up to $70, to $80 that they want.”

Once demand returns, Stevens said “oil prices could spike quickly if companies decide to lay off workers and cut back on new investments. That could rekindle interest in cleantech initiatives in the private sector, apart from what is expected from public stimulus. In the topsy-turvy world of energy investments, OPEC may be a key factor in reviving green energy next year.”

Editor’s note: All monetary numbers in this report are in U.S. currency. Associated Press writers George Jahn, Vienna, and Alex Kennedy, Singapore, contributed to this article.