Henry GroppeEnjoy low oil prices while you can: guru
Barry Critchley, Financial Post Published: Saturday, February 07, 2009
Henry Groppe, founder of Houston-based Groppe, Long & Littell, is83 years old, a vegetarian and has been a forecaster in the oil and gasbusiness since 1955. And he is not afraid to go against theconventional wisdom. One year back he predicted the oil price wouldcollapse in the second half of the year -- and not reach the muchtalked-about price of US$200 a barrel.
Now Groppe, a special advisor to the Toronto-based Middlefield group ofcompanies, has done his analysis and concluded that between now andyear end the price of oil will double. If that forecast pans out, oilwill hit US$80 a barrel, or more than double what others arepredicting. His advice to consumers: Enjoy the current low gas prices,because they won't last for much longer.
"Given enough time, it's the fundamentals of supply and demand balancesthat control the price," Groppe said. "It's just like journalism: 'Getyour facts straight,' " he said, when referring to moves inside the80-million-barrel-a-day global oil business.
He bases his 2009 consumption forecast relative to 2008 on three suchfactors: the two-million-a-day barrel cut in production from OPEC, thebulk of which will come from three countries (Saudi Arabia, Kuwait andAbu Dhabi); the four-million-barrel-a-day increase in demand that willresult from the average 50% decline in the crude oil price; and the 1.2million barrel drop in consumption that will flow from the globalrecession. Put them all together and what emerges is a4.8-million-barrel-a-day net oil shortage.
"There has to be a big upward correction in prices to bring things back into balance," Groppe said.
Groppe pointed out that two of the factors are dynamic, meaning thatso-called demand elasticities are associated with them: a 0.1elasticity between price and demand and a 0.3 elasticity between priceand world growth.
Overall, the reduced consumption effect of the global recession, whilelarge, will be more than offset by the effect of the lower price.
"[The significant] price change, because there is so much volatility,has much more impact on oil price than economic activity," he said.
Groppe said cutbacks by OPEC, unusually cold weather and China drivingup the price of distillate (because of a plan to substitute for coal)explain all but US$25-US$30 per barrel of 2008's peak-oil price. Heputs the rest of the gain down to the actions of "momentum traders.They piled on," he said, noting the current price is about US$20 abarrel lower than what fundamentals would dictate.
The veteran forecaster said "depletion and rational exploration" arethe two most important "controlling fundamentals" in the oil industry.He argues that depletion gets underway when production from a new wellstarts while explorers are focused on finding the biggest discoveries.Groppe isn't impressed with much of the analysis done by governments,agencies or companies.
"The big problem is the terrible quality of the data. Do it long enoughover the years, you get some feel for what the actual [supply anddemand] balances are." But you have to try and pin down what's actuallyhappening versus the misperception of what's happening," he said.
bcritchley@nationalpost.com