The Oil Price Bubble: How Low Can It Go?

While most people are asking "How high can oil go?", a lot of informed analysts are wondering how far the price of oil will drop when the bubble bursts. T. Boone Pickens is shorting oil, the chief of the IMF considers an oil price drop more than just possible, Saudi oil minister Naimi suspects prices may fall into the $60 to $70 range for a while, and the IEA has thought for several weeks that international oil prices are likely to fall for many reasons.

Many "doomseekers" would like to think that oil production has peaked, and prices will keep climbing to $200/bbl, $300/bbl and higher. But the inside analysts in the industry believe that prices are more likely to fall--significantly--before they go that high, if they ever do.

Oil has been on a tear since last summer, when investors began reacting to financial turmoil and economic weakness in the United States – and the resulting decline in American dollar and interest rates – by moving aggressively into crude oil futures markets.

Since then, crude prices have climbed nearly 50 per cent from $70 a barrel. That increase came even as analysts were reducing their forecasts of global demand growth this year, in light of growing economic weakness in the United States and elsewhere.

The stunning price rise has been driven almost exclusively by investors who were bailing out of the dollar and other financial assets and pouring into commodities, Judith Dwarkin, chief economist at Calgary-based Ross Smith Energy Group, said yesterday.

“The fundamentals don't support prices at $80, let alone $100,” Ms. Dwarkin said. She said global demand growth has slowed in recent years, while spare capacity among members of the Organization of Petroleum Exporting Countries has expanded somewhat, even as inventories of gasoline are at robust levels.

“The greater prices diverge from what is fundamentally supportable, and the longer they stay at a distance from what is fundamentally supportable, the greater the risk of a correction, and a large one.”...She has forecast an average price of $75 a barrel for this year.

Oil consumption in the developed world is dropping more sharply than anticipated just a few months ago because the subprime crisis has contributed to increasing economic weakness, Mr. Lynch said. Even emerging economies have slowed their demand growth in the face of record high prices, he added.

Prices are remaining high owing to speculation. “It's people saying the stock market doesn't look good, real estate doesn't look good, the dollar doesn't look good, so let's buy commodities,” he said.

He said prices could drop below $50 a barrel over the next three to five years, if OPEC is unable to significantly cut production in the face of weaker demand.___GlobeandMail_via__EnvironmentalRepublic

Other analysts think the prices will remain in the US $90 to $110 range for the foreseeable future, if world economies continue to grow.

Al Fin readers understand that far more oil is still in the ground, than has been pumped. The price of pumping and refining that oil will likely rise as the more attainable oil is depleted. High oil prices (above US $60 a barrel) are likely from now on. Anything above $60 at this time is likely due to lively speculation by hedge investors, and perhaps even manipulation by high level traders in the run-up to US presidential elections this November. A lower dollar and higher oil could have a significant impact on US voter mood in November.

In the long run, however, technology is king. Better oil production technologies will keep the EROEI for oil from skyrocketing. Within the decade we will see unexpected growth of the bio-energy sector, reducing demand for petro-crude. Nuclear energy growth in many countries--probably including the US--will reduce demand for other petro products due to shifts in transportation and home heating from oil to electricity. Better utility-scale electrical storage will bring more large-scale renewables into the energy picture. More efficient electricity transmission and distribution (high temp superconductors, HVDC, etc) will make electricity more invisible to the landscape, but more reliably available. And better efficiencies in energy use across the board will further reduce use of oil. It will all add up.

The oil dictatorships of the middle east, Africa, Russia, Venezuela, and the far east will need to find other sources of income if they do not want to end up like North Korea and Zimbabwe.

Update: Brian Wang at NextBigFuture has an update on the huge oil field that straddles the US:Canadian border, the Bakken field. With oil prices high, you can expect oil exploration to enjoy a huge boost.