Oil prices in the lap of the gods, says PNA’s favorite economic guru

Unpredictable events and their political and economic repercussions will drive oil prices in the near future, but in the end prices will be higher

Kay Cashman

PNA Publisher

The price of North Slope crude plunged last week, falling below the $20 mark for the first time since the summer of 1999. Economists attributed the drop to fears of a major recession spurred by the fallout from the Sept. 11 terrorist attacks. The day before the attacks North Slope crude was trading in the $25 per barrel range.

PNA’s favorite oil price guru, consultant Roger Herrera, said his crystal ball is “very murky these days.”

Unpredictable events and their political and economic repercussions rather than trends will determine oil prices for the foreseeable future, he said. The global uncertainties both economically and militarily make it “very, very difficult to put forth a logical assessment of future oil prices,” Herrera said.

“Obviously, the world economy is going to have considerable influence on supply and demand. A prolonged recession will greatly impact demand and therefore impact oil prices. … But OPEC is not going to be able to do what it wants to do in the coming months. In the aftermath of the terrorist attacks it’s going to have to be much more considerate of local and world opinion. … The politics of the Middle East will have a considerable influence on the actions of the producing countries there,” Herrera said.

“OPEC is as concerned about this sort of war situation as America is. They can’t make extraneous political decisions that show them to be insensitive to the world situation.”

He cautioned against belittling “the impact these acts of terrorism have had. I think the psychological impact on people traveling, on taking worldwide vacations, on using energy in a normally excessive way, will be greatly affected.”

A huge fall in world demand, Herrera said, makes “control very difficult to achieve” for OPEC.

“OPEC has every expectation that it can keep the price of oil at the lower end of the range … at about $22. I don’t see prices going greatly below that for any length of time. … If oil went down to $16 per barrel, OPEC would say ‘to hell with world opinion, we have to curb output for our own economic reasons,’ ” he said.

“So, I would sort of … go with the flow for the next 12 months. … What happens on a month to month basis will be determined by those two factors – the economy and politics.

“Having said that, I would argue that the most likely scenario in a year’s time is a higher oil price rather than a lower price because in a year’s time our resolve to take care of Bin Laden and others like him will be showing results and because the world economy is likely to be picking up by that time. If those two things come to pass then the price of oil will inevitably be higher,” he said.

The result of America’s resolve could “give rise to a sort of minor triumph and the economy could turn around rather quickly,” Herrera said.

“It’s in the lap of the gods,” he said.