Skip to comments.Forbes warns of oil bubble [price could return to $30-35]
Posted on 09/05/2005 7:39:23 AM PDT by cloud8
PUBLISHING billionaire Steve Forbes has predicted that soaring oil prices will lead to a crash that could make the hi-tech bust of 2000 "look like a picnic".
Mr Forbes, publisher of Forbes magazine, said the price of oil, which peaked at more than $US70 a barrel on Monday as Hurricane Katrina headed for the US Gulf Coast, was unsustainable.
He said factors such as inflation and increased demand for oil from China and India accounted for only a small part of the price hike from $US25-30 a barrel three years ago.
"The rest of it is sheer bubble speculation," he said.
Mr Forbes, who was speaking at the opening of the Forbes Global CEO Conference in Sydney yesterday, said the higher the oil price rose, the harder it would eventually crash, creating more pain for hedge fund managers and their clients.
"I don't think it's going to go to $US100 but if it does the crash is going to be even more spectacular," he said.
"It will make the hi-tech bubble look like a picnic -- this thing is not going to last."
He predicted that oil would fall to $US30-35 a barrel within a year.
Mr Forbes's comments came as the price of oil eased following US Government comments that it could release some of its Strategic Petroleum Reserve.
The 700 million barrel stockpile is set aside for emergency use and could be used to counter oil shortages caused by Katrina's impact on the Gulf of Mexico, which accounts for about a quarter of US output.
After leaping nearly $US5 a barrel to $US70.70 on Monday, US oil futures retreated more than $US1 a barrel yesterday.
I get free enterprise perfectly. There is a difference between the market working and price gouging.
If someone is charging $6.00 a gallon for gas, that is price gouging (depending, of course, on where you are--but in the CONUS, price gouging.)
But considering that few remember the industry in anything but the starving coyote look, it is no wonder that you think it fat when the ribs no longer show.
I remember 30 cent per gallon gasoline, but I made a whopping 16 bucks a day before taxes, too. Quarters were silver then, as well. A really nice new car could be had for a mere $2000.00.
Prices have gone up. Wages have gone up, housing has really gone up (where are the price gouging people there?).
Welcome to the world of long term inflation. Oil proces are just catching up.
But the link doesn't say lift costs. It says production costs. In every other industry, production costs includes a lot more than merely transporting the product out the door; it includes all the costs that came before that time. So wouldn't the oil production costs include all of them -- explortation, drilling, lift, etc.?
I heard a commodities broker say that oil can't go above $75/barrel, because at that point it becomes economically feasible to turn coal into oil. If he's right, oil could spike to $100, but it couldn't be sustained at that level.
Since you are so close to the oil industry, what would you say is the cost it takes to produce a barrel of oil?
Production departments are concerned with taking an existing well (new or not) and getting the oil out. Production costs include well stimulation, surface equipment, pumpjack and production equipment maintenance, workover costs, electical power, and personnel solely concerned with those functions.
Drilling costs are separate.
That distinction carries right into job titles and duties: Drilling engineer vs production engineer, for example.
You could only with difficulty be able to take the fixed (once it is done) cost of drilling and spread it over the total production of a well on an ongoing basis as a cost per barrel and report as an average because it would be constantly changing. That would not reflect the cost of producing a barrel of oil today. A good well reaches payout (preliminary, drilling, and completion costs paid off), and continues to produce oil which translates to profit if the price of oil exceeds the lift (or production costs).
During the last price crunch (late '90s) a lot of stripper wells were plugged because the lift costs exceeded the price per bbl. The only guy I knew who had steady work was a Canadian who spent a year gearing down Canadian pump jacks to cut losses.
Your cost to lift (or produce) a barrel of oil is something you can readily calculate as an ongoing expense on a per barrel basis--it is the operating cost of the well.
One of the reasons I like this industry is the fact that it is like no other, save in the respect that at the end of the year, the books better be in the black or the stockholders won't be happy campers.
While those means could be built, not many are going to rush out and invest in a processing plant that is guaranteed to lose 1/4 of its projected revenue, just by virtue of going into production and causing the price to drop, and may well cause speculators to bail out and leave the plant incapable of recovering its construction costs.
In a way the quandry is similar when drilling oil wells, but the investment to drill a well and bring it on line is so much less than that for a synfuels plant, there is usually time to recover the venture capital before the well (or a large number of them) impact commodity prices.
If oil prices crash, the derricks are laid over and the drilling rigs mothballed until prices come back up and operators want to drill wells again. You can't do that with a synfuels plant if it has not reached payout unless you have verrrry deep pockets.
Would the plant pay for itself at $75 per barrel? $65? and what rate of return would that bring on the initial investment? Given a choice, I'd build an oil refinery.
Can you define price gouging?
T Bone says oil demand = 87 million barrels per day
and oil supply = 85 million barrels.
My advice to freeper over the past 15 months has been to trade you wheels for an econo box and use the insurance/tax/gas money you save to dollar cost into a good energy fund like vanguard. At a minimum this will hedge your gas consumption expenses.
If our economy crashes under the weight of energy-caused inflation, it will trigger a global recession. Oil will be much less in demand as the economies China and India, dependent on our consumers having the money to buy their products, implode. If you know anything about the "all bidness" as we say in Texas, you know a boom is ALWAYS followed by a bust. Forbes is correct. The bigger the boom, the deeper the bust.
What do you suggest they do? Donate their "excess" profits to charity? Price their gas below the market rate, in which case it will rapidly be bought up by traders, not "minimum wage" consumers?
I suggest you go get a minimum wage job and see how many times you can fill your tank at $100 a week.
I'd prefer to develop my knowledge of economics, so I'm worth more than that to potential employers.
I'm not gonna beat this dead horse any longer. Personally, I believe if these prices remain this high or go higher yet, we'll see a huge transition to alternative sources of transport.
Certainly--isn't the market great? If oil prices never increased, we'd never see development of fuel-efficient alternatives.
Well, Mr. Forbes still has five months for his prediction to occur, but I rather suspect that he still isn't going to take a public short position in oil futures in this market.
LOL you waited almost a year to reply? Steve's a nice guy, but.......
If the Russians ever get their petro act together, and if Nigeria manages to stem the rebellion in her oil delta, and if we ask China and India pretty please not to use so much oil, and if America can arrive at a concensus on her energy policy which takes into account crazy Hugo Chavez along with ANWR, new refineries, nukes, etc. etc...maybe we'll see prices return to the mid to high fifties.
But don't hold your breath ;)
Still waiting for this to happen
LOL. Hope springs eternal..
> Still waiting for this to happen
See you in ‘08 :-)
It's a good thing for Mr. Forbes that he didn't decide to act on his prediction and short oil back in 2005.
NYMEX crude oil 121.80
When it crashes to $30 the fall will echo around the world.
That’s $30 in 2005 dollars. Adjusted it is now $118.72.