$100 A Barrel for Oil?

Kurt Brouwer July 26th, 2007

I can remember back in the early 1980s, when I was at Merrill Lynch, there were projections of $100 per barrel oil. That never happened, in fact, oil soon fell to $10 a barrel.

Now, with oil at $78 per barrel, the magic century mark is not so far-fetched. James Pethokoukis at Capital Commerce Blog posts today on a study from Goldman Sachs:

‘Oil prices have surged again, and investment bank Goldman Sachs thinks they have the potential to spike to near $100 a barrel by the end of summer unless Middle East production increases. How would a rise to, say, $95 a barrel affect the global economy? Some key take-aways from a new analysis by the bank:

1) The firm’s research suggests such a jump would reduce world economic growth by 0.3 percent over one year, from 4.5 percent to 4.2 percent.

2) Given that the global economy was resilient to the rapid 60 percent rise in oil prices in the first half of last year, a spike of a lesser magnitude from here is unlikely to cause a notable downturn.

3) Unless the price hike is sustained—and the bank expects it to fall back to current levels—it would not have enough of an effect on inflation to force the Federal Reserve to raise interest rates…’

‘…My take: This is not a bank that expects oil prices to ruin the economy today or in the future. While theories about “peak oil”—that world oil production is about maxed out as demand keeps rising—are popular on the Internet, it is tough to find an oil analyst or natural resources fund manager with even the slightest sympathy toward them. Peak-oil guys are still outliers on Wall Street…’

The good news is that our global economy has adjusted very well to the enormous prices increases of the past year or so. And, another increase beyond this level, will not kill us or even slow things down all that much.

Higher prices will make alternative energy sources more competitive and that’s good. It will also make it worthwhile for companies to drill more and to develop methodologies for extracting oil from shale, tar sands and other sources that have been unprofitable until now.

In case you have not been following the ‘peak oil’ theory that refers to the belief by some that the world’s oil production has peaked, is peaking or will peak very soon. Similar beliefs have been put forward for many years and, so far, have proved false or at best premature.

Did you enjoy this article?

Comments are closed.

Trackback URI |