Note that Credit Suisse has lowered its price projections to $60 for 2009. The main reason for the lower price expectation is much worse than consensus forecasts for GDP growth, and with it, increases in oil and gas demand, from China.
Click to enlarge (hat tip reader Michael):
Yves Smith says: Econjournal,
First, OPEC had problems with members exceednig quota levels when prices were high. The incentive to cheat to meet national budget/income requirements is even greater when prices fall.
Second, demand for oil fell from 67 MBD to 59 MBD in the first oil shock. That was due merely to higher prices. The impact of a global recession could lead to an even greater % fall than then. But even with the first oil shock level of demand destruction, from a base of 84 MBD now would be nearly 10 MBD. And OPEC would find it very hard to enforce cuts that deep.
wintermute says: Analysts are yet another highly paid group of banking employees and you have to wonder if they deserve so.
With oil trading at $63 a five-year old could tell you that it would be “about $60″ next year.
Reading the conversation above, I agree, downward price pressures still exist. I can tell you one thing is that if oil drops to say $40 and then discovery and new investment slows, green
alternatives also slow.
When we finally come out of the recession – and peak oil hits – the price rise from $40 to $200 a barrel will be monumental.
Anonymous says: OPEC will most probably want at keep oil prices at around 100 Euro and will most likely drop production to meet that target. As for demand then there are two separate issues. Individual consumer demand for oil is dropping across most major economies but most importantly in the US, India and China. Secondly business consumption for oil does not appear to have decreased at all over recent months. Credit Suisse of course have made one major assumption and that is that currencies will remain stable, which seems highly unlikely to me. Oil could be 160 dollars a barrel by Christmas or conversely drop to 20 dollars a barrel. Currency volatility will be important and those currencies which exhibit stability will most form a basis for oil valuation going forward (that might be the dollar).
mdf says: OPEC will most probably want at keep oil prices at around 100 Euro and will most likely drop production to meet that target.
I’m with Ms. Smith on this one: the recession will be a very hard kick in the gonads of oil consumption. OPEC will attempt to reduce production to drive the price up, but there are at least three unpleasant realities at work:
0) as noted above, the cartel will find it difficult to reign in the cheaters,
1) As production begins to equal consumption, volatility will increase. This alone will tend to bias a rational consumer towards efficiency, it being a hedge against the Saudi Oil Minister farting in public — and the concomitant freak out by traders at NYMEX.
2) No one will ever forget $150/bbl. No one. If only because the lead up to that price essentially killed the SUV market in the USA.
My own estimation is that with gas-electric hybrids on the loose — current manufacturers can’t keep up with demand, even in the face of nasty economic outlook — and PHEV’s almost in production, demand for oil is set for a long term decline (modulo Middle East drama). Numbers: half of all oil goes into passenger vehicles. Typical car on the road for 10-15 years, or a replacement rate of about 5% per year. A PHEV would erase ~80% of the oil consumed by a car. Putting it all together, this could amount to 3% per year reduction in oil consumption over 15 years.
DownSouth says: Yves Smith said…
Second, demand for oil fell from 67 MBD to 59 MBD in the first oil shock. That was due merely to higher prices.
Say What?
The early 1980s recession was a severe recession in the United States which began in July 1981 and ended in November 1982….
The Federal Reserve’s extremely tight monetary policy intentionally plunged the American economy into a deep recession.
Employment conditions deteriorated throughout the year. The unemployment rate in the U.S. reached 10.8% in December 1982—higher than at any time in post-war era. Job cutbacks were particularly severe in housing, steel and automobiles. By September 1982, the jobless rate reached 10.8%. Twelve million people were unemployed, an increase of 4.2 million people since July 1981. Unemployment rates for every major group reached post-war highs, with men age 20 and over particularly hard hit. Blacks and Hispanics suffered proportionally greater job losses than whites.
http://en.wikipedia.org/wiki/Early_1980s_recession
Another myth floating around out there is that OPEC is undisciplined. Actually OPEC showed amazing discipline during the 1980s:
From EIA International Petroleum Monthly, February 2008:
World Oil Supply
OPEC
1979 31.3
1980 27.4
1981 23.4
1982 19.7
1983 18.4
1984 18.4
1985 17.2
1986 19.2
One key difference this time is that in the 1980s non-OPEC production was increasing rapidly:
non-OPEC
1979 35.5
1980 36.4
1981 37.1
1982 38.3
1983 39.4
1984 41.0
1985 41.8
1986 41.9
That clearly is not happening this go-round.
World
1979 67.0
1980 64.0
1981 60.6
1982 58.1
1982 57.9
1983 59.6
1984 59.2
1985 61.4
1986 62.1
Like I have said repeatedly, at this particular stage of the game, if the Saudi royal family perceives that it is in its best interest for the price of oil to go up, it will go up. It’s really as simple as that.
I know that doesn’t sit well for those emotionally invested in market ideology, or in American exceptionalism, but these are the sad realities string Americans in the face.
mft says: I agree with wintermute. There are two very big problems:
(1) We may start to climb out of the coming global recession/depression just when the downward slope after peak oil begins. A jump from $60 to $200 a barrel then seems only too possible, and that may act as a permanent brake – each time economic activity looks set to take off, it would get strangled by oil prices.
(2) The hoped for market-based boost to alternative energy sources through higher oil prices may be heavily restricted over the next few years. But we still desperately need the new energy sources, so we will need to replace the market support by (global) government support.
mdf: car buyers may think again about hybrids when they see gasoline prices fall.
mdf says: mft: car buyers may think again about hybrids when they see gasoline prices fall
But surely they will also think again when the price rises, per your “permanent economic brake” scenario?
Though why such a thing should occur is still not entirely clear. After the first cycle(*), one would imagine a strategy of avoidance would quickly arise, given that people may be stupid, they are not insane. In short, super-efficient vehicles are an economic inevitability, and that will short-circuit your scenario.
(*) While the 2008 July spike was not part of a scarcity cycle, the net effect in terms of future vehicle purchasing decisions will likely be the same.
Anonymous says: Don’t forget about supply shocks. Any skirmish in the Middle East will shoot prices higher. Let’s just agree that we cannot predict the future, ok? The only sensible thing to do is to protect against the risk that rising oil prices really hurt, as long as you are buying protection against this risk in a cost effective manner.
fajensen says: The incentive to cheat to meet national budget/income requirements is even greater when prices fall.
There is one more way to cheat:
Buy the Oil futures then have your retarded uncle blow himself up in an attack of your most annoying neighbour’s oil facility.
Don’t forget to blame Al Queda.
mft says: mdf: nice if it happens that way.
Anonymous says: “Don’t forget to blame Al Queda.”
That’s a given. The strategy of the last ten years is becoming less opaque every day. I’m sure Barak Hussein Obama’s administration will have a bit better luck convincing native Iraqis to allow our “police force” to remain in country for just a few more years. Hell, he might even be related. This is classic bad cop/good cop (chronologically inverted cliche) on an international scale.
As for oil price forecasts, more typical bullshit from our banking masters. Here’s a tip, watch conventional crude oil production numbers instead of pricing. That is the road to the truth.
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I don’t think so. I believe oil will rebound if consumption stops its slide and if supply shocks occur. The oil market is in such a state that a million barrel per day increase or decrease can substantially move the prices. When OPEC cuts comes through there might be a strong supply shock.
http://econjournal.com/2008/11/04/what-is-happening-with-oil-and-how-do-we-hedge-against-its-price-rise/