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Oil prices will “normalize” in high 20s, lower 30s, predicts Herrera PNA’s favorite price guru says situations developing in Saudi Arabia, Venezuela, Japan and China will likely push oil prices even higher in the next decade; a fifth factor could have even greater impact Kay H. Cashman PNA Editor-in-Chief
Petroleum News • Alaska'’s favorite oil price guru, Roger Herrera, said in February that he believes significant drops in the price of oil are a thing of the past: “The price inevitably has got to go down a little, to perhaps as low as $23 a barrel. However, I believe the price of oil will stay up at least for the short-term future, 12 months or so. If the price of oil does stay up for the next 24 months — even with a temporary drop to $23-$25 a barrel — it’s likely to stay up forever” because the increase in worldwide demand will keep it up. At that time, Herrera predicted $30-plus oil in the long-term.
On Dec. 13, with oil prices in the low 20s for the first time in many months, the long-time Alaska oil and gas consultant told PNA he is sticking with his initial prediction. Herrera says the “determining factors” behind the future price of oil lie outside the United States.
“It's a difficult time to contemplate what's going to happen even one year from now. Four countries will determine the price of oil in the next 12 months and probably in the next decade — China, Japan, Venezuela and Saudi Arabia,” Herrera says. “The unfortunate part is that with perhaps the exception of Japan, they are countries over which we have very little influence. Yet, they will have a profound impact on the future price of oil.” Four key questions “One has to ask a question about each of these countries,” he says. “With China, the question is, will China double its use of energy in the next decade as some people are forecasting?”
Herrera thinks the “realistic answer is more likely to be yes than no.”
With Japan, he says the question is, “will Japan get over its sort of social revolution that has been dampening its economy for the last seven or eight years and become a viable economic unit once again?”
While Herrera believes that no one should underestimate the economic impact of a social revolution and stresses Japan’s “very difficult time with theirs,” he believes it’s a matter of “when” they get over it and not “if” they get over it.
“If Japan once again becomes an economic force to reckon with, its energy use is going to soar,” Herrera says.
For Saudi Arabia, he poses the question, “will its sort of monarchy fall apart?”
Saudi Arabia, Herrera says, is one of the most repressive Middle East countries. “One has to assume that the survival of its government is not assured. People in Syria, where there is a dictatorship, have much more freedom to express themselves than the citizens of Saudi Arabia.
“Saudi Arabia’s monarchy is, if anything, slightly pro-U.S.,” Herrera says. “It is certainly relatively sane with its impact on OPEC pricing and solidarity. It does not want to see $40 or 50 per barrel oil.”
If Saudi Arabia goes into revolution, Herrera believes its stabilizing impact on OPEC will disappear.
His fourth question, regarding Venezuela, is already being answered: Can the United States expect Venezuela, which controls the chairmanship of OPEC and has a growing anti-American bias, to maintain a neutral status in regard to production and pricing?
To believe so is “probably naive,” Herrera says. “Venezuela is a hawk with OPEC pricing. ... Venezuela is a big exporter of crude to the U.S. It is going through a dictatorial transformation with its president. It is changing for the worse as far as impact on oil prices and the U.S. is concerned.”
The answers to the questions about these four countries — consumers China and Japan and producers Saudi Arabia and Venezuela — are “more likely to push up the price of world energy than not,” Herrera says. “When?” is the question The only thing Herrera will not forecast is when the situations developing in these countries will have an upward impact on oil prices.
“Any one of these four countries doing the sort of thing that my questions imply will result in higher oil prices,” he says. “A combination of more than one at the same time will obviously have an even greater impact.”
What does Herrera think about the people who say, “look we’ve been dealing with OPEC for the last 30 years. The same pattern we see emerging now has happened in the past: OPEC gets too greedy and that results in high oil prices. This prompts the oil industry in non-OPEC countries to start drilling exploratory wells. That — coupled with OPEC countries producing more oil than they agreed to produce (another factor motivated by greed) — results in more oil on the market and OPEC losing pricing control. The price of oil goes down. End of story.” History is not repeating itself But history isn’t exactly repeating itself, Herrera says.
“The interesting thing this time is that the oil industry was so traumatized by $9 oil that it has been very loathe to recognize this price rise. It was slow to initiate aggressive drilling. When you look at wells drilled around the world, you find that so far in the year 2000 there have been 50 percent more wells drilled this year than last year. But most of this new drilling took place in the back half of this year. The question is, how long will it take this oil to come to market — another six months to a year?” The answer to that question will have an impact on the price of oil in the near future, Herrera says.
So, the market forces are working. The oil industry is drilling to find non-OPEC oil.
In the meantime, Herrera says, OPEC could do “something sensible,” such as “voluntarily reduce the price of oil so as to take away the incentive for drilling.
“If OPEC did that — brought the price down to the range of $20 per barrel — the Western world would heave a sigh of relief and say, ‘okay we can afford this,’ sit back and go fat and happy again. Twelve months later OPEC could artificially raise the price back up to $35 per barrel. But this type of action takes economic logic. While I’m sure OPEC knows the theory , it is much more difficult to put it into practice — and they won’t,” Herrera predicts. “There is no evidence OPEC is interested in moderating the price of oil and therefore maintaining control. Venezuela will try to keep price of oil quite high.
“If OPEC doesn’t intentionally bring it down, we have non-OPEC oil companies drilling more wells — presumably that will lead to oil prices coming down in the next year,” he says.
“But then we have these four nations. Individually or collectively they can radically impact the price of oil. That equation will have the most impact on the future oil price,” Herrera says. Herrera’s guess is high $20s, low $30s What’s Herrera’s guess for the next 12 months?
“I would guess that we’ll most likely see oil prices in the high $20s and low $30s,” he says. “That, I think will be the norm. But if we see the influence of one or more of these external factors coming in, it will push prices up higher than that.
“My guess is that one of the two producing countries I named will experience a situation that will put upward pressure on the price of oil. And the two producing countries, Saudi Arabia and Venezuela, will do something silly, in some fashion, to push up the price of oil.” The fifth element There is one factor that Herrera has mentioned in the past and continues to emphasize as the most critical element in the oil pricing equation: the geologic factor.
“I still think that the ability of the producing countries to increase production is quickly coming to an end,” he says. “The world is consuming 78 million barrels a day and that is growing by 1-2 percent per year. Can the producing countries continue to produce increasing amounts of oil in the next decade? The answer is no.
“If I had to say what the price of oil will be in the future, I can’t say. I can say that we, as Americans, should be quite content at $30 a barrel oil. We, as Alaskans, can, I suppose, be quite content at $40 per barrel.”
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