THE FUTURE PRICE OF OIL

Petroleum now sells for $68.17/barrel. This morning, the Honolulu Advertiser reported that Fereidun Fesharaki predicted crude oil would drop to $40/barrel this summer because of inventory build-up. This is contrary to historical precedence, for summer driving normally reduces this supply. Yet, this recession is tricky, and our economy might yet cave in again. Anyway, is he believable?

Well, he has been a Manoa Campus colleague of mine for about thirty years. He was energy advisor to the president of Iran in the late 1970’s, when he was asked to re-invigorate their nuclear program. He chose to leave the country and ended up at the East-West Center, where he has been speculating on the future price of petroleum. He is a Senior Fellow at the Center and drives a very expensive car, so he must be doing well.

Does this mean he has predicted well in the past? Not necessarily, for like all prognosticators, he is sometimes right and many times wrong.

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Let me start by quoting Alexei Miller, CEO of Gazprom, the world’s largest natural gas company, who said on 10June08 that oil prices will reach $250 a barrel in the foreseeable future. A month later, T. Boone Pickens said, oil will never go below $100/barrel again. T. Boone had double egg on his face, for on December 8, long after oil sunk below $100/bbl, he made another guess that oil would not drop below $40/bbl. Alas, oil, that month, slipped below $33/bbl. However, Pickens and Miller are natural gas men.

How is our Department of Energy doing? At the end of 2007 it predicted that oil would cost $70/bbl in 2030….yes, 2030. Then in half a year, oil surged to $147/bbl. So, in December of 2008, they said oil would go to $130/bbl in 2030. They could be right, but do you know how much this forecast is worth?

So in February this year, when oil again dipped below $35/bbl, the USDOE reported that oil prices would average $43.25/bbl in 2009 and $54.50/bbl in 2010. They had the nerve to stick in those cents. At about the same time, Morgan Stanley saw a drop to $25/bbl in the April-June period (and oil barely got within $10/bbl of that figure), averaging $35/bbl in 2009 and $55/bbl in 2010. Tossing into a pot and stirring, we might get something like $40/bbl in 2009 and $55/bbl in 2010.

As oil is looming to hit $70/bbl soon, you can only wonder why these largely credible individuals and organizations bother to keep embarrassing themselves. My rule of thumb is that these prognosticators could be right, but they are usually wrong. But, then, again, baseball hitters don't even get 4 hits out of 10 at bats for the year. On the other hand, you want your personal heart surgeon to be right 100% of the time. Oil economists fall somewhere between these extremes.

The only way that the USDOE and MS can be close is if Fesharaki’s surmisal turns out to be true. Absent any better information, then, the following table (dollars/barrel) should prevail.


YEAR...ACTUAL........ADJUSTED

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1960 .........2.91 ...................20.88

1972 .........3.60 ...................18.29

1975 ........12.21 ..................48.22

1979 .......25.10 ...................73.44

1980 ........37.42 ..................97.47

1998 .......11.91 ...................15.52

2008........99.65....................99.65

2009.....($40??) ...............($40??)
2010.....($55???)……...….($55???)

I don’t predict oil prices with any kind of seriousness (although you can analyze my 2012 prophecy in the box on the right), but my gut feeling is that the $55/barrel figure will turn out to be correct, but for 2009, and 2010 will exceed $70/bbl. T. Boone, incidentally, now says that oil will hit $75 by the end of this year, confirmed by PVM Oil Associates, which expects a rally to $78/bbl in six months.

In case you missed it, on 26May09, Saudi Arabia predicted $150/bbl in three years. Yes, 2012 is shaping up to be a monumental year.

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The Dow Jones Industrials rose 19 to 8741 and world markets were mixed. Gold increased $8/toz to $982.
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