Peak-a-boo: Goldman says oil ‘likely’ to hit $150-$200 by 2010. That means $5+ gasoline.

rising-graph-250_tcm18-59875.jpgGoldman Sachs’ Arjun N. Murti said in a May 5 report:

The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.

That would mean gasoline prices of $5 to $6 a gallon. Unless of course we permanently suspend the gasoline tax, in which case gasoline prices would only be $5 to $6 a gallon.

Why should we listen to Murti? Well, back in 2005, when prices averaged under $60 a barrel, he was one of the few Wall Street analysts who predicted oil could soon hit $105 a barrel — or higher if we don’t take the right actions quickly:

There will be a peak in production earlier than expected, and that post-peak decline will be more dramatic than currently assumed unless there is a sustained increase in investment in oil and gas production, greater consumer efficiency and alternative energy.

That may all seem obvious, but it has come as a big shock to Detroit, DC policymakers, truckers, and apparently most of the American public. Certainly the fundamentals of oil supply and demand have changed, probably forever, as I have repeatedly written (see below). And as Bloomberg reports, Murti is not alone

Deutsche Bank AG Chief Energy Economist Adam Sieminski, who forecasts oil averaging $102.50 next year, today said Asian demand and limited extra supply will keep pushing oil to record levels. There’s a “huge risk” that prices will rise to a level, perhaps $200, “when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,” Sieminski said in an April 25 report.

I tend to agree that the price is likely to keep rising over time (with occasional dips) until there is serious demand instruction. Most people, including me, thought that would have happened by now. But obviously prices are going to have to go considerably higher. Key factors include:

China, the world’s fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade’s low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East….

In Venezuela, production has slumped to about 2.34 million barrels a day from almost 3 million barrels a day in 2002, according to Bloomberg’s estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.

Iraq’s oil production has yet to reach levels attained before the U.S.-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.

Mexico’s production has fallen below 3 million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30 percent drop at Cantarell, its largest field, which accounts for 40 percent of output.

And, of course, Russia may have seen peak production (as the Financial Times wrote recently)

Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s largest independent oil company, told the Financial Times he believed last year’s Russian oil production of about 10m barrels a day was the highest he would see “in his lifetime”. Russia is the world’s second biggest oil producer.

Mr Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically, saying that in the oil-rich region of western Siberia, the mainstay of Russian output, “the period of intense oil production [growth] is over”.

But what about OPEC?

Spare production capacity of the Organization of Petroleum Exporting Countries is low and the group’s exports may fall because of “lackluster” supply growth and rising domestic consumption in member countries, the Goldman analysts said.

Goldman’s bottom line is not pretty:

The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth” is leading to higher prices, the analysts said. That could result in a “sharp correction in oil demand.”

And, by the way, don’t blame speculators:

There’s a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said. “Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator.”

Commodity investors, the Goldman analysts wrote, are “helping to solve the energy crisis” by speeding up the process for oil companies to spend more on energy projects and at the same time encourage efficiency.

I agree. Anybody who is helping to forward price the coming peak in conventional oil production is doing all of us a favor.

Related Posts:

22 Responses to Peak-a-boo: Goldman says oil ‘likely’ to hit $150-$200 by 2010. That means $5+ gasoline.

  1. David B. Benson says:

    Biodiesel time yet?

  2. Ben says:

    David, biodiesel is awful.

  3. John McCormick says:

    Yes, David, say something constructive that reflects a bit wider view of the topic than your repeating the words biochar and biodiesel. I won’t say what that reminds me of.

    I see an American working class and senior citizens being bled financially by steadily (and, for the foreseeable future) increasing gasoline and diesel pump prices.

    We AGW believers might not care much about the family of five living in the burbs, driving several large vehicles and commuting more than 40 miles each way to the job(s); jobs that keep them out of bankruptcy and foreclosure. Yes, they made their choices based upon what is best for them but we all have to face the raw fact that their financial collapse is our problem to deal with also.

    If (when) Congress enacts and the President signs a climate change mitigation Act, it will contain some very expensive subsections and impositions on all of us. R&D programs, mass-transit construction and rehab, tax credits for renewables and authorizing a huge bureaucracy to run the program will need tax revenues to fund all that. Then, imposing carbon caps will cost we consumers more money for fuel and electricity and the consumer goods we need that have energy costs tied into them…regardless of the rosy outlook Env. Defense gives that picture.

    I dread a future of increasing vehicle fuel costs coming at the very time we homeowners, apartment building owners and vehicle owners will have to find the capital to retrofit our lives. Americans carry about a trillion dollars in credit card debt and about 9 trillion in mortgage debt. Our personal credit worthiness is already bad (on average) and we are standing in the middle of the decarbonization track.

    We are all in this global warming future together and $5-$6 gasoline will not make the lifestyle changes easier. It might feel good to the purest enviros but average Americans will not take the cost of carbon caps quietly if they have no funds to invest in no-carbon, less-carbon alternatives. Who is going to pay for the solution?

    John McCormick

  4. Paul K says:

    Earl Killian said a while back that he didn’t understand why I don’t think it necessary to artificially raise the price of carbon. This is why.

  5. hapa says:

    i second john mccormick. bleeding local buying power dry is a bad plan and a cruel one. we didn’t get what we needed out of other speculative hyperinflation — we just paid for it. where’s our health care? where’s our fast internet? where’s our cheap energy of the future, from deregulation?

    are any of those things now more likely, the money having been stolen? no. instead we have greater influence of health insurance companies, greater influence against net neutrality and high broadband standards, greater opposition to decentralizing and cleaning energy supply.

    take a look at page two of the big book of capitalism. you already read that price motivates change. now read the part about how relative wealth affects future prospects — people with less income becoming risk averse, people with more, risk-seeking. lots of risks out there for people to seek right now. hope your favorite is the one the big dogs pick. 1000th time’s the charm, they say.

  6. David B. Benson says:

    Ben — Biodiesel is certainly better than diesel. (Did you know that when Rudolf Diesel first demonstrated his Otto cycle engine at the Paris Exposwtion in 1900, it ran on vegatable oil? It seems Herr Diesel was very foresighted, stating that someday the world would run out of petroleum.)

    Now biodiesel made from rapeseed is probably a poor, if no outright bad idea. But biodiesel can be made from a wide variety of vegatable oils, for example Jatrophra, which is poisonous so can never be a food.

    I see no way to replace the use of the heavier fuels, such as (bio)diesel, for ships, large trucks, construction machinery, and many, if not most, trains.

  7. Earl Killian says:

    Paul K, petroleum is not the only fossil fuel. I thought you knew that.

  8. Paul K says:

    Earl Killian,
    The price of coal is also going up. I see this as an opportunity to hasten the transition and recommend focusing on making alternatives and efficiencies cheaper (direct subsidy, tax incentives and rebates, and ending capital gains taxes on alternative investment).

  9. steve shoap says:

    Please look at my website and see a way to make small cars safer in collisions. My ideas will allow for 100 mpg vehicles that Americans will be willing to drive. The cars won’t be death traps and will still be small.

  10. Peter Wood says:

    The futures market is valuing oil in 2010 at $112-113, so if Murti is right, there may be an opportunity to make some money there – or hedge against increased petrol costs :)

    I used to be a fan of the idea of “peak oil – bring it on”, due to climate change being much worse than declining availability of oil. Unfortunately coal is too much of a substitute good for oil, so declining oil and gas supplies will lead to more coal use and probably more climate change overall.

  11. Donald B says:

    I agree that the high cost of oil will make the transition more painful, and the more painful the less rich you are. However, without oil costing more, NO ONE except a few moderately to very well off will make the effort.

    The only way for the “gas tax holiday” to be even remotely realistic would be if, following its reinstatement, it was to increase by $0.10 a month or two months until it was at least $1. Then everyone would know what was coming and could make appropriate plans. But that increase, at whatever rate, MUST be irrevocable, so that everyone would plan for it and not assume if no one prepared, it would be recinded. But you can imagine the bruhaha over passing such a plan.

    Americans are going to have to demand smaller cars (at least for commuting) and change how the choose where to live, like closer to work. Economists have shown that home ownership is a drag on the economy;e.g., people in Michigan will not or cannot move to other states where cars are being built because they cannot sell their homes (at least for what they feel they need, or paid for them if purchased recently).

  12. Greg says:

    Look a little further than transport, people. This will drive up the cost of food too.

    The future we are choosing for ourselves is starting to look more and more like “Soylent Green” .

  13. John Mashey says:

    1) My wife just got back from UK, read the complaints the the papers about $4/gal gas. Was not overly impressed.

    2) The Oil Drum has survey of predictions, of which mean & median are shown in solid red.

    This has typical Hubbert profile, with a flat-looking plateau, and then drops, and then drops steeper.

    Right now, we have:
    a) Flat production.
    b) Increasing demand 1 (China, India)
    c) Increasing demand 2 (Saudi Arabia, Venezuela, etc, subsidizing gas internally)

    If the referenced chart is anywhere near close, we’ll keep b) and c), but get:
    a) Decreasing production.

    3) Regarding gas tax holidays, I recommend Australian economist John Quiggin’s Holiday froim Sanity.

  14. charlie says:

    Gas at $10 a gallon doesn’t prevent cars from running in the UK. Gas at $8 a gallon is workable in europe. I think we are overestimating the cost of gas in driving — it is still a smaller component than depreciation (not to mention parking and insurance).

    The real problem is gas increases are driving up inflation across the board. Carbon “taxes” don’t make much sense when energy costs are increasing. substitution taxes make some sense — driving up mass transit usage — but to move the country to a level around Chicago — 25% of the workforce using transit — might require a trillion dollar investment and take 25 years. And transit systems like Chicago don’t answer the problem of all the non-communing trips you do in a car. That might require a move to a NYC level — which is frankly impossible.

  15. Lamont says:

    Goldman Sachs routinely makes announcements in one direction, while doing the opposite.

    This makes me think that GS is talking up demand in oil futures so that GS can unload their long positions for a profit and enter into short positions for a coming decline in oil prices.

  16. John Mashey says:

    re: GS
    So, read Lord Ron Oxburgh, geoscientist & ex-Chairman of Shell, who was talking about peak Oil & global warming years ago. I might ignore GS, but I wouldn’t ignore him – he’s very smart, he’s very straightforward in saying what he thinks, and as Shell Chairman, quite possibly might have adequate access to real information.

  17. Lamont says:

    Peak oil predicts the supply side of the equation over the course of decades. It does not tell you about the demand side, and it tells you nothing about supply and demand, speculation and sentiment over the course of minutes, hours, days or months.

    Oil crashing back down to $60/bbl 3 months from now wouldn’t invalidate peak oil theories at all (not saying anything about >= 3 months from now — could rebound rally to $200/bbl after that).

    Now if we suddenly found another 5 Mbd of production capacity and oil permanently fell to

  18. Lamont says:

    hmmm…. that’s annoying… last half of my post got eaten….

    anyway, peak oil is only about the supply-side and only long term.

    its not about the short-term. prices can decline purely for technical/sentiment reasons.

    its also not about prices directly, since high prices could induce demand to fall which could cause prices to decline.

    i would treat the announcement from GS as a contrarian indicator and expect over the course of 3-6 months for oil to fall below its current level.

  19. Robert says:

    Lamont – your post does not make much sense. Oil cannot be stored in significant quantities once it has been extracted. Nor can it be disposed of (in the way that rotten bananas can be chucked away). Therefore supply = demand in anything other than the very short term. The only variable is price and the current escalation in price demonstrates how price-inelastic demand is. i.e. people will go on using their cars even if gas doubles or trebles in price. Here in the UK petrol is over £1.10 a litre and it has made no difference at all to driving patterns – the M25 is still a car park most of the time. For all these reasons the idea that “demand destruction” will bring down prices makes no sense whatsoever.

  20. Marc says:

    Here are several starting points for alternative economic policy and radical social change. I welcome your comments and suggestions on reinvigorating and redirecting public discussion on future necessities and short-term “economic laws.”
    (1) Creation of a social net is a precondition for sharing work and reducing working hours. If everyone had health care, people would share their work and be free from enlavement to alienating work.
    (2) Reducing working hours is the most vital step to conserving energy.
    (3) Conservation is more effective than building more coal and nuclear power plants.
    (4) Building community centers and infrastructure investments have multiplier effects. Public spirit eviscerated by privatization can revive when health care, housing and education are seen as priorities for a social state.
    (5) The world is turning from Bushism, the Washington Consensus, the “panacea” of market opening that has led to the global food crisis.
    (6) The melting of the dollar should mean the melting of Republicanism. People can unite on vision and turn from voodoo and witchcraft economics!

  21. sustanon says:

    This makes me think that GS is talking up demand in oil futures so that GS can unload their long positions for a profit and enter into short positions for a coming decline in oil prices.

  22. I dread a future of increasing vehicle fuel costs coming at the very time we homeowners, apartment building owners and vehicle owners will have to find the capital to retrofit our lives. Americans carry about a trillion dollars in credit card debt and about 9 trillion in mortgage debt. Our personal credit worthiness is already bad (on average). Thanks for posting this great and wonderful read.