In this weekend's Barron's Magazine Sandra Ward interviewed Charles Maxwell, Senior oil analyst with Weeden & Co. for the article Oil Prices: A Pause, Then Up (subscription required).
Where are oil prices headed?
We are now getting a reaction to the higher oil prices. It is translating into slower economic growth and, of course, it is allied with a rise in interest rates. Don't think that it is just that rising oil prices equal lower economic growth. It is a question of rising oil prices and less liquidity and higher rates that's a triple threat. The bottom could be in the high 40s, though that wouldn't be sustainable. On a yearly average, we will stay in the 60s, but we'll spend a lot of time in the 50s. Then they'll start up again in 2008-2009 and go up for some time. When we get to 130 or 150 there will be another pullback.
How do you get to those numbers?
In 1930 we found 10 billion new barrels of oil in the world and we used 1.5 billion. We reached a peak in 1964 when we found 48 billion barrels and used approximately 12 billion. In 1988, we found 23 billion barrels and used 23 billion barrels. That was the crossover when we started finding less than we were using. In 2005, we found about 5 billion to 6 billion and we used 30 billion. These numbers are just overwhelming.
In the article, a graph titled West Texas Intermediate Crude shows forecasted oil prices. In 2010, the forecast is $85; 2015, $180; and 2020, $300 per barrel. While I am bullish on oil prices, I am not sure I am that bullish. As prices climb, there will be a response. A key point to remember is that prices can only climb as high as consumers can afford to pay. At $300 per barrel, oil will be priced beyond many consumers' reach.
Having said that, I must admit I thought when prices originally went beyond $60 per barrel the consumers' reach. I was wrong. But at some point, the cost of oil will simply be too high for consumers. So I am cautious when the price forecast gets much above $100 per barrel.
As stated, I am bullish on high energy prices and do think higher energy prices will persist. According to an online Wall Street Journal article OPEC to Hold Emergency Meeting (subscription required), OPEC will hold an emergency meeting on October 19th to discuss oil production cuts. OPEC must believe that higher oil prices are here to stay if they want to defend a $60 price level.
Late Saturday, an official from the United Arab Emirates oil ministry said he had received a fax from the OPEC president inviting all OPEC energy ministers to Qatar's capital for a meeting. A U.A.E. official, whose minister is one of the few in OPEC to have remained silent since talks of output cuts emerged, said discussions were continuing in the run-up to the meeting.
"Consultations continue between member countries," the oil ministry official said. The U.A.E. has yet to decide whether or not it will cut production. "We have not agreed a cut in our production yet," the official said.
OPEC ministers have become increasingly concerned in recent weeks over a sharp decline in crude oil prices, from highs of $78 a barrel in July to below $60 last week.
The energy story should be an interesting one. Many people and organizations do not believe that higher energy prices will persist and do believe that the commodities bubble has burst. Others, like myself, believe that commodity cycles take a long time to play out because of the significant amount of time to bring production to the market. The energy story, because of its vital importance to everyone, will be very interesting to follow.