Oil Should Go Up

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The EIA's new outlook expects the global financial crisis to put the brakes on the world economy, citing “additional declines in crude oil and other energy prices”; however, Energy and Capital editor, Chris Nelder, doesn't believe prices can go much lower, particularly where oil is concerned.

For 2008 and 2009, the EIA projects a decline of a half-million barrels per day (mbpd) from 2007 levels, owing largely to a 1.2 mbpd reduction in U.S. demand, which would be partially balanced out by still-increasing demand from China other developing countries.

Where the agency sees "additional declines in crude oil and other energy prices," I don't believe prices can go much lower, particularly where oil is concerned. Its new 2009 forecast for crude is $51/bbl, down from $63.50 in its previous forecast.

Neither the EIA nor the IEA has any sort of predictive track record. Last year, the EIA published a retrospective of its annual energy outlook reports, and found it had consistently underestimated future oil prices since 1997. The IEA projected a cost of $21/bbl as recently as 2002, rising to $29/bbl by 2030!

With oil production costs now well above the going price of oil (at $42 a barrel today), it doesn't pay to keep pumping oil from the more recently developed fields. OPEC is expected to cut its official production targets by at least 1 mbpd, signaling it wants to keep oil in the $70-75 range.

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