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An Inconvenient Truth About Oil


One analyst thinks surging prices are here to stay

If you're an oil sheikh, you will love what Paul Horsnell has to say. If you're a consumer, you won't. Horsnell, head of commodities research at Barclays Capital in London, has been an oil-price bull for years, and he doesn't see any reason to change. He thinks we will probably be stuck with today's high price levels next year and that oil prices will spend some time trading above the yet-to-be-pierced $100 per barrel. He is confident that 2008 will be the seventh straight year of price increases. The average price for 2007 will be about $72 a barrel.

A rumpled former Oxford economics lecturer, Horsnell, 46, spent 11 years as assistant director of the Oxford Institute for Energy Studies, which has close ties to such OPEC countries as Kuwait, Saudi Arabia, and Venezuela. He joined JPMorgan (JPM) in 2001, moving to Barclays Capital two years later. He studies world supply and demand statistics, trying to figure out how much new oil will be coming from Kazakhstan or how rapidly China's thirst is growing. While the rate of increase in world demand for oil has dropped off since the huge 4% surge in 2004, demand continues to grow because of rapidly increasing consumption by China and the Middle East producers themselves.

At the same time, new supplies have been a disappointment because of slimmer exploration pickings and lack of access to new areas. All you need to do is look at the difficulty ExxonMobil (xom), BP (BP), and Royal Dutch Shell (RDSA) are having in increasing their oil production. Horsnell thinks 2008 may be the year when there is no increase in supply at all from countries outside of OPEC, leaving the world even more at the cartel's mercy. It used to be conventional wisdom that higher prices would crush demand and boost supply, but that hasn't proved to be the case.

The new dynamics, he argues, are better seen in prices for oil to be delivered in five to seven years than on the volatile nearest futures contract, which grabs headlines. In 2007, near-term prices gyrated all the way between about $50 per barrel and nearly $100 per barrel. But since 2003, the long end has been moving steadily upward, to nearly $90 per barrel now for oil to be delivered in seven years. Horsnell believes that such long-range prices represent "the market's view of the long run, sustainable price."

The oil analyst doesn't expect the fundamentals that are driving up prices to change anytime soon. No massive new sources of energy are likely to come on stream. Other options such as Canadian tar sands are environmentally ruinous, or in the case of biofuels produced from corn, push up food prices. Horsnell doesn't see any relief.

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