Is Oil Heading For $100? (Why has Wall Street missed it so badly?)

Forbes ^ | 10.19.04 | Dan Ackman

[Truth666]

NEW YORK - Yesterday, in writing about the rise in oil prices--which have roughly doubled in a year--I noted, "No one saw it coming." (See: "Oil Hits $55 Alarm; Greenspan Hits Snooze.")
As it turns out, a few people did see it. And now some of those seers are saying the recent "spike" is no spike at all, but the start of a long-term trend. It may be that the price of a barrel of oil is heading for $100, if not higher, by the end of the decade.
To be sure, the conventional wisdom is that oil prices, which fell a bit yesterday to about $53 per barrel, are going no higher and will likely fall back. That seems to be the view of Wall Street firms, most of which say as much in their research reports. Bear Stearns (nyse: BSC - news - people ), for instance, last month forecast a $25 price in 2005. Even relative "bulls" like Goldman Sachs (nyse: GS - news - people ) are talking about whether prices in the high $30 range might be sustained.

That investors as a whole see the current price jump as a blip is shown by the fact that, while prices of shares in oil companies like Exxon-Mobil (nyse: XOM - news - people ) or BP (nyse: BP - news - people ), and oil services firms, like Schlumberger (nyse: SLB - news - people ) or Transocean (nyse: RIG - news - people ) have risen, they have not risen by anything like the price of the oil they drill and sell.

"To the best of my knowledge, not once [since 1998 when oil was around $11 per barrel] has any Wall Street firm forecast oil prices to be on a yearly uptrend," says Stephen Leeb, president of Leeb Capital Management, a New York investment manager and author of The Oil Factor (Warner Business 2004). Why has Wall Street missed it so badly? Leeb suggests that the answer lies not in economics, but in mass psychology, specifically studies of social conformity.

Leeb himself is forecasting higher, indeed skyrocketing, prices. He is not part of a crowd, but he is not all alone either. He is joined by, among others, Matthew Simmons, chairman of Simmons & Company International, an energy banking firm in Houston. Simmons speaks of a phenomenon called "Peak Oil" and says it is "as inevitable as death," though, like death, predicting its precise timing is not easy. Leeb and Simmons point out that, unlike the oil crisis of the late 1970s and early 1980s, which was a political phenomenon, the current price increases are fueled by supply and demand, which are less transitory than politics.

What is the scenario in which oil hits $100 per barrel in the next five or six years?

Just as the current price increases are said to be fueled in part by rising demand from China and India, those countries will also play a large role in the long term. Leeb says that China and India now consume energy (not just oil, but all forms of power) at a per capita rate that is one half the world average. Compared to the rich nations like the U.S. and Western Europe, their per capita consumption is one-seventh as large. If these two countries become wealthy, as everyone expects they will, and merely start to consume like the rest of the world (forget about their consuming like the U.S.), that rise in demand will have a dramatic impact on world energy markets.

Leeb estimates that if China and India continue to grow, the demand for oil will rise by 6.1% per year. To meet such demand, the world would have to raise output by 43% by 2010 and to triple it in 20 years.

Is such an increase plausible? Simmons points out that, while new discoveries are certainly possible, even likely, 70% of the world's daily supply comes from fields that have been drilled for 30 years or more. Leeb adds that even Saudi Arabia, despite a stagnant economy, consumes 24% of the oil it drills. In order for it to boost production, it will have to consume a higher percentage of what it makes. As for the world's second largest oil exporter, Russia, if its economy weren't a basket case, it might be using its entire output internally.

Leeb says that during the last oil crisis, the world was producing at 70% capacity. Now it's at 99%. Because there is no slack in the system, every time there is a trial in Russia, a strike in Venezuela, a hurricane off Louisiana or a surge in violence in the Middle East, the oil markets react dramatically. The good news is that we are more efficient than in the 1980s, and we spend a much smaller share of gross domestic product on energy. But while demand may slack off short term due to slower growth, the longer term is troubling regardless of new production technology or far better conservation.

Where have we heard this before? In the 1970s and 1980s, some prognosticators spoke about the world "running out of oil." That prospect is not what drives the current fears. It is the apparently inevitable supply-and-demand driven market movements that may force the price of oil to $100. And that's a lot scarier.

[Truth666]

"To the best of my knowledge, not once [since 1998 when oil was around $11 per barrel] has any Wall Street firm forecast oil prices to be on a yearly uptrend," says Stephen Leeb, president of Leeb Capital Management, a New York investment manager and author of The Oil Factor (Warner Business 2004). Why has Wall Street missed it so badly? Leeb suggests that the answer lies not in economics, but in mass psychology, specifically studies of social conformity.
This article just has to be recorded for posterity ... $100, I mean, if there's one.

[SittinYonder]

Time to join the environmental whackos and buy a hybrid?

[LibertarianInExile]

Bear in mind that this is really about market manipulation and fears of instability if Kerry is elected. There will be a huge drop in prices if Bush is elected, since the market 'knows' what he will do. Kerry, on the other hand, is a crapshoot.

[zeugma]

the price of a barrel of oil is heading for $100

After the election, it will drop back to approximately $30 in relatively short order. This $50/bbl price is being held up by Soros and a few others. It won't last long past the election.

[oceanview]

I agree.

but if it doesn't fall back to $40, if it stays in the mid 50s or higher, there will be a recession in 2005.

[SauronOfMordor]

Time to build more nuke power plants

[stylin_geek]

I think what is happening with oil is somewhat reminiscent of the food supply situation. From what I understand, there is more than enough food to feed the world, the problem is distribution. Oil appears to be in abundance, however, the infrastructure is not capable of meeting demand.

[Eric in the Ozarks]

$40 maybe. In a market like this, even a freshman trader can't go wrong.

[Gibtx]

its being manuiplated by the DNC goons...... jezz just wait till the election is over ...... if dems win it will go down if not it will go up ....

[Sam the Sham]

If oil prices don't drop back we will have more stories of old people being found frozen to death in unheated apartments like back in the 70's. And as you say a deeper recession. And a series of unstable, one term presidents.

[Kaslin]

Not if but when President Bush is reelected

[Zeppelin]

A great portion of the problem is in the fact that India and China have such rapidly growing economies. As their industries grow, the demand for energy goes up. As demand goes up, the producers sell first to the highest bidders (America, Japan, European countries) and then whatever is left over is sold to the other countries. So, as China and India demand more and more energy, we have to pay more and more to outbid them. This problem SHOULD let up a bit in the next couple of years, due to the fact that both countries are experiencing ridiculous inflation.

[nonkultur]

If over $50 a barrel is anything near permanent. We would be seeing dozens of coal liquification plants opening for synthetic petroleum.

[dpwiener]

Oil prices may have spiked up, but they are not going to stay there long-term. Basic economic theory says that such high prices would quickly attract enormous research and development and investment in other energy sources (as well as conservation measures which are presently uneconomical). The eventual result in a few years will be a host of new sources, a glut of energy which will drive prices down far below current levels, and the demise of oil as the major source of the world's energy.

[proxy_user]

Why don't you join the ownership society, and buy oil stocks?

I get much more in dividends than I spend on gas.

[narses]

Soros is manipulating the futures markets. This is hedge fund driven speculation, NOT supply and demand driven pricing.

[machman]

Exactly. Same thing in the late 70's and early 80's. People actually believed it then, and stuff started to get built. We aren't running out of oil, but we are near the end of really really cheap oil. There are massive oil shales, synthetic possibilities, etc., but they are only economical at a price that is higher than we have seen in the past 20 years.

[Sooth2222]

...a gallon of gasoline is still cheaper than a gallon of milk or the bottled water in the cupholder.

Maybe it's time to buy a new SUV, not a hybrid!

[ARCADIA]

If over $50 a barrel is anything near permanent.

It is not the rising oil prices that bother me; its the ever shrinking dollar that expresses itself as a rise in oil price. If we don't start manufacturing soon we are going to need a wheelbarrow of dollars to buy a gallon of gas.

[eno_]

if it stays in the mid 50s or higher, there will be a recession in 2005.

If that is true, such a recession would start today.

$60 oil would make "heavy hybrids" an economic slam-dunk. And we would have to start building PBRs. But it's not the end of the world.

[narses]

``Higher oil prices are certainly inflationary,'' said Stephen Leeb, who manages $100 million at New York-based Leeb Capital Management, ...


That may be the SMALLEST 'Capital Management' firm outside of Spokane I've ever heard of. And in Spokane it would be small, very, very small. With 8 staffers - http://www.leeb.net/our_people.html - and maybe a million a year in gross revenues, how much does he make for himself?

[KingNo155]

From what I read in the past, American wells need about $35 a barrel price in order to make a small profit due to enviormental regulation, I also recall wells being pluged because it cost more to pump than the market would pay.

[JasonC]

The out months rarely make headlines

[JasonC]

Or we could just stop printing dollars hand over fist...

[PeterPrinciple]

Most soothsayers should be shot on site............

[Dog Gone]

Oh hell, when I signed on with an oil company 25 years ago, our annual forecasts predicted $100/bbl oil before 1990. What would that be in today's dollars, something like $175/bbl?

I've seen so many false predictions in my career that I don't believe anything anymore. Hurricane Ivan knocked off more than 1.5 million barrels of oil from the US market. We've recovered less than a third of it since, and the rest will take months because of the extensive damage to Gulf of Mexico offshore facilities.

But it will all come back on as soon as possible.

[SittinYonder]

Why don't you join the ownership society

I've always been suspicious of secret organizations like the Masons and civic clubs like Kiwanis. Would I have to learn a secret handshake or pay dues? ;-)

[papasmurf]

Well, this is as good a forum as any for my wild idea...and, please, chime in with your own, or just critique mine. :)

I propose that the Congress authorizes an award of one trillion dollars to the American(1) company that produces a clean, made man, affordable, plentiful, high performance, high efficiency fuel. My thoughts are that we will have to allow a time limited monopoly(2) to the American companies in order to get it in the supply lines and the crude based products out, taking all risks, consumer usage for a period of time (5 years?) then, release it to the world. That said, where does the money come from? A dedicated, in a lock box under the threat of the death penalty, tax? A national lottery? Sell George Soros and all the hollywierdos? Don't know. But I do know this (or think I do)...what is worse...to allow our economy to go down the tubes, allow other nations d e f a c t o control over us and our national security...or a tax that will enable us to do something about it, and go away when it's fulfilled it's purpose, also under threat of death penalty. :)


(1) Why American only? This is in the National Security interests of our country. It's not necessarily a commercial endeavor.
(2) The initial production, distribution, and use of this fuel should be, and will be, an experiment (like a beta test) we cannot encourage other Nations to utilize it until and when it proves to meet our pre-described specifications. :O) P

[SittinYonder]

a clean, made man,

Is that someone in the mafia who never committed a crime?

[GeronL]

start drilling AMWAR

[ARCADIA]

Or we could just stop printing dollars hand over fist...

If you do that you default on your debt, crash the world's capital markets, abandon international trade, and collapse our own government. Until we produce the stuff here, we either import it, or come to a complete and grinding halt.

Just during the month of August we had a trade deficit of over $60,000,000,000.00; that is enough revenue to generate 60,000 solid well paid productive private sector jobs for 1 year(including overhead, manufacturing costs, labor, R&D, piles of tax contibutions, and a substantial ROI). But, we decided to give it to China instead. That is the way it goes month after month, and year after year. This economic stupidity is destroying the US; we are committing economic suicide, in the name of "cheap products", which have proven anything but cheap.

[planekT]

The figures that I've heard is that oil would have to reach $80.00 dollars a barrel to equal the price we saw during the Arab oil embargo of the early seventies, adjusted for inflation.

Here are some things I've gathered to help put this in perspective. Around 1998, oil went to $10 dollars a barrel. If you looked at the cost to produce a barrel of crude at that time, it was something like this. 50 cents to a dollar a barrel in Saudi Arabia. The next closest competitor outside the Middle East was in the North Atlantic Sea, at around 10 dollars a barrel. In Texas, a barrel of crude cost around 17 dollars a barrel to produce.

10 dollars a barrel was a thirty year low in 98. Adjust for inflation (2.5% *30 years) and the price would be about 17.50 a barrel, at the lowest price thirty years ago.

The average price of all those years was probably around 21 bucks a barrel. I hate to break the news here, but obviously Middle Eastern countries have one hell of an advantage cost wise.

We should drill in Alaska I guess, but it is not a long term solution. We will never be able to compete with the Middle East for oil or gas, nor will anyone else. They have reserves you haven't' even heard of yet. The Empty Quadrant in Saudi Arabia is not empty.

We will do better dealing with the Middle East then not until we figure out something to burn other then oil. That day will come, but it is still a long way off.

Iraq could produce near what Saudi is doing today, and in pretty short order (less then a year from one fellow I know who estimated 6 or 8 million barrels a day) They are the immediate future.

[AdamSelene235]

This economic stupidity is destroying the US; we are committing economic suicide, in the name of "cheap products", which have proven anything but cheap.

The fundamental problem is that these decision are not being made by the people of the US or China but rather by our Central Banks.

Only a government is stupid enough to buy a US bond paying 4% when the currency has been debased at a average rate of 8% per year for a decade.

[farmfriend]

ping

[JasonC]

We do not need to expand the money supply to buy foreign goods. We pay for foreign goods with domestic services, and by allowing foreigners to invest here. Inflating the money supply is a pure, free choice to have a currency that is worth less tomorrow and the day after that than it is today. Every worker produces, it has nothing to do with any magical process of assembling physical things out of other smaller physical things.

No human effort has created an atom of matter since the dawn of time. All we do is rearrange things into forms others like better. Anybody who does anything that pleases another person, enough that said other voluntarily surrenders cash for the results, is a productive worker. US workers annually produce $11 trillion in new value out of their direct efforts, and can afford to consume that much or any lesser quantity (to allow investment for future projects beyond those they can already accomplish), indefintely.

[JasonC]

Um, the government isn't buying said bonds, it issues them. Which means it is short them. Duh. If it has 20 of its own IOUs in one of its pockets, it is still short every other IOU it has ever issued.

[AdamSelene235]

Um, the government isn't buying said bonds, it issues them. Which means it is short them. Duh. If it has 20 of its own IOUs in one of its pockets, it is still short every other IOU it has ever issued.

Thanks for the tip. I was referring to the Chinese government.

[Kornev]

"It is not the rising oil prices that bother me; its the ever shrinking dollar that expresses itself as a rise in oil price. If we don't start manufacturing soon we are going to need a wheelbarrow of dollars to buy a gallon of gas."

The US dollar is experiencing 'hyper-inflation' with energy prices, and could certainly turn into another peso as a useless marker of value. Manufacturing and programming jobs are feeling. Wage deflation is happening, bigtime.

If we don't counter this, it might be $5 a gallon for gas, and the wages around $10 an hour.

This is the worst case of course, but we must be prepared for it. Outsourcing of all industries will deplete the USA of wealth. The higher gas prices are a sign.

[RockinRight]

I predict oil under $35/bbl by the time of W's second-term Inauguration.

[Truth666]

http://www.reuters.co.uk/newsPackageArticle.jhtml?type=worldNews&storyID=597505&section=news
6 October, 2004
As of Tuesday, damage from mid-September's Hurricane Ivan had kept closed 453,000 barrels per day from the U.S. Gulf of Mexico -- equivalent to about half the output of small OPEC producer Indonesia.

[JasonC]

It has about $400 billion in foreign exchange reserves, mostly dollars but some Euros and some Yen. And last I checked, there were $4 trillion in US debts outstanding, which has another zero on it. Most of them are held by banks and other financial intermediaries, which means most of the final claimants are actually bank depositers. Not governments. Banks have depreciating liabilities to match their depreciating assets, so why would they care? Depositers deposit in no interest checking accounts and 1-3% CDs. Nobody shoots them if they don't, they could withdraw all their deposits tomorrow and walk around with pockets bulging with gold coins. But they don't.

[Oreo Kookey]

This reply is just a rambling of what's been going on in my mind for weeks. Unless something happens to suddenly stop things in their tracks, it seems that there is a new normal invading our country and we have been accepting over 30-35 years these changes that have brought us to this point. What point? Well, that something that causes oil prices to sky rocket to 50 - 60 - 100 bucks a barrel. That something that causes us to be complacent about the possibility of gay marriage being legalized, or the ripping away of everything (they say - "religious") Christian. Courts that are making the laws when that is unlawful. People who lie, cheat, steal, rape, etc, are elected to pubic office on every level of government. And it's OK. Praying in schools is not allowed because someone started a rumor that there is separation of church and state provided in the Constitution, which is just another lie.

We kill 4 to 5 thousand babies every day in this country who haven't even had a chance at the pursuit of happiness guaranteed every American. Why? For our convenience. Doctors and the entire medical profession is falling apart because of layers and their greed. Didn't this start when they started advertising in the media?

Yes, I'm sick about oil prices for sure. The price of a tank of gas could rise to a price I can't afford so I can go see my kids who live 83 miles away. I'm sick of all of these things. My list is short compared to all the things I'll think of when I've pushed the Post button. Well, that's enough to get my drift. I must be in another blue funk.

I believe that the buck stops here. With each one of us. We like to blame the government, the police, ooh yes - that's a good one. Let's beat them up for doing their jobs. The politicians. Big business. But who are these people?

I guess it depends on what your definition of us is.

[oceanview]

don't say that - the free traders will be trashing you if you mention offshoring and wage deflation, which they swear is not happening, so long as the compensation of the executive suite and government workers are included.

[Truth666]

That leads me to answer the core question of this thread :

Why has Wall Street missed it so badly?

Just like in the case of Ivan losses (less than 0.5% of world's daily ouput), it seems that Wall Street is not capable of performing elementary arithmentic operations.
Take for instance this ... : Unlike in the early 1980s, when most of the oil the U.S. consumed was still domestic, now 57% of the oil consumed in the U.S. is imported (see: "New Oil Crisis: 1979 In Spades").
http://forbes.com/home/energy/2004/10/18/cx_da_1018topnews.html

[Dog Gone]

I work for a major oil company with major operations in the Gulf of Mexico, and I can tell you that it's far more than that. I get daily reports. I read them.

[AdamSelene235]

This sums up the problem nicely:

The US as a Nebt Debtor: The Sustainability of US External Imbalances

[Texas Songwriter]

You have stumbled upon the truth. The real danger to the American way of life....life as we have come to know it, is that the dollar has been destroyed by Alan Greenspan's easy money policy. He took fed rates to 1% while the treasury sold fiat money to Japan,Swiss, and any other entity that the Fed could coerce into buying essentially diminishing in value dollars. Once he got to 1% he was, in essence, paying banks who borrow from the fed to borrow money. This is in addition to the profligate spending of the US government. Then at low interest rates everyone and his dog borrowed money for cars, refinancing already paid for homes, credit card buying, and now the time is rapidly approaching to pay the piper. The USDX (dollar) is beginning a rapid decay and today was about 88. The price of gold has a direct inverse relationship to the dollar. I suggest you releive yourself of as much paper as possible and get physical gold. The dollar, I fear, at this time next year will cease to be the world's reserve currency. Conditions today do no mimick 1973 in that today there is not an oil shortage but rather an oil access shortage...more demand from China and India and others. If alqaeda were to stop the flow of oil by blowing a tanker in the Strait of Hormuz, the Panama canl, the Suez Canal,the Strait of Gabralta oil will immediately go to well over 125 dollars per barrel. But most importantly your way of life, your job, the American existance would cease to exist. We (USA) need to drill in ANWAR, develope nuclear facilities, and even put some wind mills off of the shore of Martha's Vinyard just to spite Kerry and Moma T. We are in one hell of a spot and the day of reconing is here. God help us if Kerry gets into the White House. Now we stand at the precipice of inflation like in 1980 when we saw 18% interest rates. I don't know about you but I will not buy anything on time with high interest rates. There goes the jobs. The only way to get out of it is hyperinflation. The government cannot lower interest rates. It went to 1% and was in essence giveing federal reserve notes away. Do you think the government will lower the tax rate and adjust your tax bill as you are paid in less and less valuable dollars. I don't think so. So here we are... you and me and the poverty pimps screaming ant the elected officials to give us a break. If I were taking bets, I'd go with the pimps because there are more votes. Remember what a great thinker once said, "When the electorate realizes they can vote themselves a raise from the public largess, this consitutional republic is over."

[Blood of Tyrants]

Time to kick the envirowackos the hell out of every legislature in the country and drill for oil HERE!

[cmotormac44]

and on and on---all pointing to the Bibical Prophecies of 'end times' and the world turmoil that will take place--God still Rules in the affairs of men!--no one has to believe but it will take place (and right on the Lords timetable)

[cmotormac44]

and on and on---all pointing to the Bibical Prophecies of 'end times' and the world turmoil that will take place--God still Rules in the affairs of men!--no one has to believe but it will take place (and right on the Lords timetable)