How soon till $150 oil and $4.50 gas?

Posted by: Adam Aston on January 15

Early last year a young Goldman Sachs analyst shot from obscurity to infamy when he predicted $100 per barrel oil. At the time, with oil still trading closer to $50, any suggestion that prices could double created shock waves. Give that analyst a raise: His forecast was spot on. Flash forward to today, and near-$100 oil is the new normal. So what next?

I’m loathe to make forecasts on this much-watched number, but the the U.S. Energy Information Administration released its near term outlook last week, and the numbers just feel off. The EIA is forecasting oil prices to to average $87 per barrel this year, up from $72 last year, and that they’ll fall a bit to $82 next year, with gasoline averaging “over $3 per gallon” in the period.

Huh? I cannot think of a dynamic that’s likely to lead to falling prices in the near term. Not supply and demand dynamics, not tax policy, not ethanol shortages (which only affects pump prices), not the security situation in the Mideast, and not even an looming US recession. The one strong point in favor of lower prices is slackening U.S. demand. In the past, a U.S. slow down could be relied on to send oil prices south. Yet as the U.S. economy looses steam today, it’s doing so in a world transformed by unprecedented growth of auto sales and broader energy demand in emerging economies. Growth in China and India is less dependent on U.S. exports, and more on internal demand, than in the past. So they’ll slow less in the event of US downturn than in the past, fueled by domestic market growth, and will naturally mop up any oil absorbed by the U.S.

I’m not alone here. In a detailed analysis released Jan 10th, CIBC World Markets chief economist, Jeff Rubin, makes the case that crude prices will hit $150 per barrel, and gas will march steadily upward to $4.50 per gallon over the next five years. Demand from developing economies is no longer coupled to the U.S. economy, and is growing faster than many models contend. Coupled with faster-than-expected depletion from existing supply and longer-than-anticipated delays for new, difficult-to-tap oil fields, supplies are going to be tight. In an unrelated statement, Fadel Gheit, senior energy analyst for Oppenheimer Co., predicted self-serve regular could hit $3.50 to $3.75 per gallon by spring, well before the traditional summertime peak driving season.

That’s not the end of it. A federal commission today announced recommendations for a 25¢ to 40¢ per gallon increase in federal gas taxes, in small increments, along with increased tolls, freight fees, and congestion charges. Of course members of the National Surface Transportation Policy and Revenue Study Commission, the bipartisan entity that made these recommendations, understand the political timing couldn’t be worse for such a proposal. But so urgent is the need for repair of public roads, bridges, rail and other surface infrastructure that they see no other path. The group estimated that spending of up to $340 billion per year will be needed over the next 50 years to shore up the nation’s neglected infrastructure. Even as I support user fees like this, I wonder what sort of maelstrom this proposal will run into. Short of another tragic bridge collapse, or similar infrastructure failure, few events could galvanize politicians into committing funds on this scale, no matter how much they’re needed.

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