Goldman Sachs: $95 per Barrel by End of Year?

By: Lowell
Published On: 7/16/2007 5:58:17 PM

According to Goldman Sachs, "U.S. crude price could top $90 a barrel this autumn and hit $95 by the end of the year if OPEC keeps oil production capped at current levels."  Today, U.S. crude (West Texas Intermdiate) for August delivery settled at $74.15 per barrel on the New York Mercantile Exchange (NYMEX). A $95 per barrel crude oil price would represent a 28% increase from current levels, and translate roughly into 85 cents per gallon more at the gas station.  That's right, $4 per gallon gasoline, here we come!

What is causing this price increase?  According to Goldman Sachs, it's pretty much supply and demand:

OPEC agreed last year to lower output by 1.7 million barrels per day (bpd), and Goldman said global oil production is down about 1 million bpd from last summer's levels.

Disappointing output growth from non-OPEC producers also helped tighten supplies, Goldman said, adding global demand was up by 1 million bpd from year-ago levels.

Supplies down, demand up, very little spare production capacity worldwide, a continuing "anxious market," a weak dollar, strong speculative investment flows into commodities like oil...all that will certainly drive prices higher.

In addition, the US Energy Information Administration's (EIA's) latest Short-Term Energy Outlook anticipates that world oil demand will increase by 3.0 million barrels per day between the second and fourth quarters of 2007. According to EIA, "[o]f this, OPEC is projected to supply 1.5 million barrels per day, with the rest met by additional non-OPEC supply and a drawdown of inventories." 

And BushCheney's "friends" in OPEC?  Well, they say that it's pretty much all our fault (refinery problems, higher demand, whatever b.s. excuse they can think of) and assert that there's no reason for them to increase their output.  Whoa now, wait a minute: there's no reason to increase oil exports - and hence oil revenues - at $74 per barrel?!?  I'm sorry, I know these countries require more oil revenues than they used to (in part because their populations have exploded, as have their subsidies to those populations), but it's simply not credible that $74 per barrel is insufficient economic incentive for OPEC nations to increase their production.

You know, I've never been a "peak oil" person, but it's stuff like this that really makes me start to wonder whether OPEC simply can NOT increase its oil output, despite its claims that it can.  In particular, I've just about stopped believing anything the Saudis say about anything; they're just beyond absurd at this point.

The bottom line is that we may very well be on our way to $95 per barrel even WITHOUT a significant oil supply disruption.  As someone who worked on world oil markets for 17+ years, that's truly amazing; I remember a time when a $95 per barrel forecast, even IN a disruption scenario, would have been laughed out of the room.  God help us if BushCheney attack Iran and the world loses that country's 3.7 million barrels per day of oil production.  Even worse, if Iran retaliates and manages to knock Gulf oil facilities offline for any length of time, we could be talking $200 per barrel easily.

This could be a long, cold winter...


Comments



iraq and oil prices (pvogel - 7/16/2007 8:00:47 PM)
Ive said it all along, we aint getting out of Iraq until gas hits 4bux a gallon.  .......


GM + Ford + Chrysler are F'd (humanfont - 7/16/2007 10:57:51 PM)
Forget 35 by 2020, they need 35 by fall 2007. Waiting for congress to force your hand; is no way to run a business. 


I couldn't agree more. (Lowell - 7/17/2007 8:23:22 AM)
GM, Ford and Chrysler are basically comitting slow-motion suicide, and their "Friends" like John Dingell are assisting them in doing so.  Instead, it's time for some "tough love":  tell these companies to double their fuel economy within 10 years (possibly in exchange for help with their health care and other "legacy" costs), and my guess is the companies would be a lot better off - as would our national security and environment.  Is this a no-brainer or what?!?


Could be long and cold.... (ericy - 7/16/2007 11:43:07 PM)
I guess I would describe myself as a "peak oil" person.  There really aren't any rational people who don't believe that oil will eventually peak, so ultimately the question is when peak occurs, and how steep will be the decline on the backside of it all.  Some who have studied this believe that peak is fairly soon.

it would be worthwhile for people to think about how to go about their business using less fuel.  If none of this comes to pass, you still end up saving money - just not quite as much.

I could toss out lots of ideas, but people's lives are all so different that what works for one person wouldn't work for others.

One complicating factor is that there is a lot of misinformation out there, and there are companies and interest groups pushing "solutions" that aren't of any help.



"Rational people" (Lowell - 7/17/2007 8:27:35 AM)
That's an interesting point about "There really aren't any rational people who don't believe that oil will eventually peak."  Actually, there are a lot of them in the oil business and the US government.  I worked at the US Energy Information Administration for 17 years, and I can tell you that the almost unquestioned assumption during that time was that oil supplies would last indefinitely, certainly through the long-term forecast period.  Essentially, the belief was that there were trillions of barrels of oil, both conventional and "unconventional," that had not yet been tapped but would be under the appropriate combination of price and technology.  Never, in the entire time I was at the Energy Information Administration, do I recall a serious consideration of incorporating "peak oil" views into long-term oil forecasts. Frankly, "peak oil" was looked upon as kind of crazy, certainly in the next 20, 30, 50 years or so...


Yea, but... (ericy - 7/17/2007 12:45:09 PM)

if you were to sit down with them and try and pin them down, they would ultimately be forced to admit that there isn't a truly infinite supply.  They may be of the belief that the supply is so large that we couldn't exhaust it in the near term, but ultimately there must be *some* limit somewhere.

Once you admit that there is some limit, then the question is how much is there actually.  One anecdotal comment that I can make is that in each oil producing country in the world, the actual peak for that country has always caught the experts by surprise.  Which itself is interesting I guess, but I am not completely sure why.  I suppose groupthink could play into it, but it could also be that in the past more drilling always produced more oil, so the possibility that a country has plateaued isn't a part of their everyday thinking. 

There is also the paradigm that humans tend to take that their actions are small in relation to the world as a whole, so worldwide resource exhaustion simply isn't possible.  Now that I think about it, this is probably the greatest underlying reason that many people reject peak oil out of hand without giving it much thought.

In light of all of this, it is quite conceivable that a worldwide peak will catch the world by surprise as well.  That's the nightmare scenario.  That the world will be caught unaware, and won't have prepared in any meaningful way.



Yeah, "groupthink" may be part of it. (Lowell - 7/17/2007 12:53:28 PM)
Basically, from what I've seen inside the government, the "peak oil" crowd is looked at as kind of...well, bonkers.  Inside the government, I'd say that the mainstream view is that oil production can go on for hundreds of years with new technologies and given the huge volume of oil that's still stuck in porous rock and has never been extracted.  Also, there's all that "unconventional" oil, such as tar sands, out there.  This could add a trillion barrels or more to current "conventional" reserves.  Finally, I'd note that many large oil producing nations are almost totally opaque, so we really have no clue how much oil they've got, what the condition of their fields are, etc.  So how do we evaluate their claims that they've got plenty of oil?  It's hard, but Matt Simmons has given it a shot with Saudi Arabia - and been lambasted for it, I might add.


Interesting... (ericy - 7/17/2007 2:52:34 PM)
Yes, it has been well known for years that we have left vast quantities of oil underground mainly because the physics/chemistry/geology make it hard to get that last bit.  The fact that it is harder to get that last oil trapped between the pores of the rock means that conventional extraction technologies won't work any more, and right now we don't have good alternative means to get at it.  You might as well say that there are abundant supplies of natural gas on the moons of Saturn, but it isn't like any of it will do us any good.

Lots of people wave around the term "new technologies" almost like a mantra, and most people don't actually have the time or the background to sit down and evaluate the possibilities to see whether they are realistic or whether they are just pie in the sky schemes.  Thus they just take comfort in the belief that some sort of technology will arise from somewhere that will solve the problem.  Catton calls this thinking cargoism - named for the cargo cults of the South Pacific.  I suppose this is an insulting characterization, but based upon comments that I see from the general public, it seems fair if not a bit harsh.

This isn't to say that some technological advance won't be made - technology is impossible to predict in that way.
But these days I see incredible amounts of effort go into technologies that are essentially useless fluff - things like video iPods or iPhones.  Or worse yet, new technologies take the form of new and deadlier weapons.

Regarding the unconventional, the trend in recent years is to simply lump that in with reserves without distinguishing it in any way from conventional oil.  Getting at tar sands is really a mining operation and not a drilling and reservoir management type of operation.  Thus as a result the economics are completely different.  In particular, recent projects up in Canada have had massive cost overruns, there are serious questions about scalability, and they require vast quantities of water and natural gas to drive the process.

Based upon what you say though, I expect that when the peak does hit, it will catch us unaware.



Don't forget hurricane season (Eric - 7/17/2007 9:31:56 AM)
The disruptions listed covered middle east supply problems but we can't forget that hurricane season will swing into high gear very soon meaning both our (Caribbean) Gulf based offshore supplies and onshore refining could be at risk.

And some people here in Virginia (mostly flat earth Republicans) bitch that a small gasoline tax increase will "ruin everything" or some such nonsense.  Well, if those few cents would make that big of a difference, then these $4 per gallon prices will certainly turn Virginia into a third world country.