$100/BARREL—MONTHS AWAY?

This is all very good news for New Energy, driving demand for it up and making it more and more affordable in comparison. Not really news for readers of: The Oil Drum

The takeaways: (1) Deutsche Bank chief energy economist Adam Sieminski says, "Something has happened. Costs have continued to escalate, and the geopolitical situation has gotten worse." (2) And Matthew Simmons (chairman, Simmons investment bank) says conditions driving oil to $200/barrel are easy to foresee. "Oil is still cheap…In the 20th century, with a few exceptions, oil was almost free. The only exceptions were during 1973, 1979 and when Iraq invaded Kuwait."

$100-a-barrel oil may be only a few months away
July 23, 2007 (Bloomberg News via International Herald Tribune)

WHO
Jeffrey Currie and Arjun Murti, Goldman Sachs Group; Jeff Rubin, Canadian Imperial Bank of Commerce (CIBC) World Markets; John Kilduff, Man Financial;
NYMEX -- Light crude. (click to enlarge)

WHAT
- Oil is hovering at the $75/barrel mark, up 51% since January and 200% since early 2003. A record number of futures at $100/barrel have been sold, amounting to 50 million barrels.
- The all-time high: $78.40/barrel, July 14, 2006.

WHEN
- Currie of Goldman Sachs has predicted $95/barrel oil this year and $100/barrel oil by 2009. Murti predicted $105/barrel oil in March 2005 but was wrong.
- Consumption to end of 2007: increasing 3.6 million barrels/day (the daily production of Kuwait + Oman)

WHERE
Currie is in Goldman Sachs’ London office. Murti is Goldman Sachs’ New York office. Kilduff is at Man Financial’s New York office.

WHY
- Predictions are somewhat mitigated by OPEC’s announcement this week it will increase production (but many analysts believe it is not capable of significant increase due to dwindling supplies and inadequate infrastructure).
- Other producers are not adequately replacing OPEC, due partially to the high costs of developing new production: Shortages of deepwater drilling equipment and workers to run them, as well as pipe welders, pilots, refinery workers and oil-sands crews are driving prices up.
- Nigerian disruptions and military action against Iran worry traders.
- High prices will benefit producers (ExxonMobil, PetroChina) but will harm transportation (railroads, airlines). High prices mean potential inflation to importers (like the US). And high energy prices cut economic growth across the board.
But high prices have not slowed demand. And major recent reports by the International Energy Agency and the National Petroleum Council say demand, driven by developing nations like Brazil, China and India, will not slow for the next 20 years or more despite the inability of supply to meet it.
Sometime in this century people will stop measuring energy in "barrel" units. (click to enlarge)

QUOTES
- Kilduff: "We're only a headline of significance away from $100 oil. The unrelenting pressure of increased demand has left the market a coiled spring."
- Murti: "Ultimately, the key to the outlook going forward is when will Saudi Arabia ramp up production…If you have a situation in which inventories globally get drawn to critically low levels, the volatility in this market is likely to explode, which significantly increases the probability of $100 oil."
- Rubin: "Prices have doubled, and demand is alive and well and accelerating…The argument that rising prices would choke demand and bring increased output is falling to the wayside."
- US Energy Secretary Samuel Bodman: "There are questions about whether the oil industry can keep up with demand…"
- Robert Ebel, Center for Strategic and International Studies: "It appears that high prices are acceptable to the American consumer."