RE: RE: GOLDMAN: Oil Could Rally To $150 This Summ
79 year old oil economist Charles T. Maxwell tells Barrons that he's sticking with his prediction of $300/barrel oil ($225 adjusted for inflation) by 2020. Maxwell expects only an additional 3-4 million barrel per day increase in production capacity before peak. The most hopeful comment: his view that a gradual price rise doesn't have to cause a huge economic downturn.
At what point do those price increases start to put too much pressure on the world economy?
Strangely enough, I don't think that it would bring the economy down. Rather, it is the suddenness of change that does that. That rise we saw three years ago, where in one year it went from $62 a barrel on average to $100, created a huge amount of economic damage. On a more gradual scale, and giving the effect of inflation its due, we will probably simply walk away from two-tenths or three-tenths or four-tenths of a percentage point of potential gross-domestic-product growth, which we will give up by being caught in this energy vise. But the world economy will advance, and it won't be brought down by this.
But so far what we've seen very high oil price volatility in recent years. If that high volatility continues then gradual adjustment with minimized economic impact doesn't seem to be in the cards.
High price volatility seems the more likely scenario. Why? For one, it is what we've seen so far. Peak to trough oil dropped by over $100 per barrel from July 2008's $147 peak to early 2009. Now oil has shot back up over $100. That's partly due to revolution in Libya. But oil had more than doubled from its bottom of a couple of years even before governments started falling in North Africa.
Each oil price spike helps cause an economic recession which lowers oil prices. Then comes recovery which increases demand and cause an oil price spikes. In a world of slow oil supply growth oil becomes a rate limiting factor on economic growth. Then the prospects for oil price spikes seems greater. Worse yet, Gail Tverberg argues financial crises will amplify the problems caused by Peak Oil with debt defaults undermining the ability of companies to invest in capital that reduces our reliance on oil. In light of these considerations it seems unlikely oil prices will send signals to the market to do a gradual smooth restructuring away from oil consumption.
Maxwell expectsto see a peak from 2015-2017and then a decline after that. But peak consumption in the West happens earlier for a couple of reasons. First off, peak exports happens before peak production because oil consumption is rising more rapidly in oil exporting nations. Many big exporters subsidize internal consumption (e.g. Saudi Arabia, Venezuela, Russia) and their oil revenues raising living standards and increase buying power. Second, rising Asian demand leaves less of the exported oil available for import by Western countries.