By William Patalon III
Money Morning/The Money Map Report
Global Oil experts continue to climb aboard the Money Morning bandwagon.
It was back in mid-December, when crude oil was trading at $90 a barrel, that Money Morning Investment Director Keith Fitz-Gerald first publicly predicted that petroleum prices would reach $187 a barrel within three years.
Since then – as global oil prices surged – other experts have chimed in with predictions that support Money Morning's stance. Among them:
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- In mid-March, U.S. investment-banking heavyweight Goldman Sachs Group Inc. (GS) issued a forecast of its own, predicting that crude-oil prices would reach $175 within two years.
- On Tuesday, noted MSNMoneycentral columnist James Jubak – an analyst whom I happen to respect a great deal – predicted that crude prices would soar to $180 a barrel in the next few years.
And it's not just the expert predictions that are supporting our aggressively early prediction: The market price of crude oil itself continues to soar.
Crude oil rose to a record $119.90 a barrel on the New York Mercantile Exchange on Tuesday, as the greenback dropped to an all-time low against the European euro. Crude oil is up 24% so far this year, and 88% from this time last year, Bloomberg News reported.
Oil prices retreated slightly yesterday (Wednesday) – the first decline in four days – on speculation that Tuesday's record wasn't supported by market data. But in a related development yesterday, Goldman Sachs reiterated its call for higher oil prices. Goldman said the window for lower prices is "closing fast" as prices rise to records, and noted that the fast-approaching summer driving season promises to fuel demand for gasoline.
"Looking into the second half of this year, given the fundamental tightness, we believe the risks are substantially skewed to the upside," Goldman analysts wrote in the investment bank's Energy Weekly report.
Clear Catalysts for Higher Prices
According to Jubak, the catalyst behind soaring oil prices is simple to explain. Just as crude oil is becoming more costly to extract and process, the three key countries that could capitalize – Mexico, Russia and Nigeria – find themselves without the capital they'd need to do so.
Without that capital, several well-documented recent discoveries won't do anything to alleviate growing shortages.
"In the short term – say, in the next two years or so – we're looking at bad news about global oil supply that could take the price of a barrel of crude to $180," Jubak wrote. "Needless to say, today's $3.50-a-gallon gasoline would look cheap if oil prices hit $180 a barrel. At that price for a barrel of oil, gasoline would cost somewhere north of $5.50 a gallon."
According to Money Morning's Fitz-Gerald, pump prices actually would be closer to $6 a gallon. But at that pain level, what's another 50 cents a gallon?
This growing crude crisis is causing economists to rethink their understanding of oil prices. Jubak says that experts once believed that $3-a-gallon gasoline would lead to a drop in consumption. But in its latest forecast, the International Energy Agency says the demand for oil actually will increase this year – despite the U.S. economic slowdown and rocketing oil prices. Demand will reach 87.2 million barrels a day this year, a daily jump of 1.3 million barrels from last year.
And as demand escalates, worries about oil supplies move higher, too.
That's partly because oil production in cash-strapped Russia, Nigeria and Mexico is headed down, just as it's doing overall worldwide. industries in three key countries — Mexico, Russia and Nigeria — find themselves short of cash. And without that cash, oil production in these countries, and global oil production in general, is headed into a decline.
Take Russia, Jubak says. That country's oil industry recently said that production was down 1% in the first quarter, and the Russian Energy Ministry says production for the full year could actually be lower than it was in 2007. But the IEA, in making its projections, had counted on an overall growth of 5% in Russian production by 2012 to offset big declines in older fields in the North Sea and Mexico, Jubak wrote.
Those older oilfields are experiencing annual output declines of 4.5 million barrels a day.
Guru Jim Rogers Questions Reserve Estimates
And Jubak's not the only one who's making such assertions. In a recent exclusive interview with Money Morning, well-known investing guru Jim Rogers said linchpin OPEC member Saudi Arabia has been fibbing about its oil reserves for years.
"Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve," Rogers told Money Morning during an interview in Singapore last month. "It's astonishing. The figure never goes up and it never goes down. They have produced dozens of millions – billions – of dollars of oil in that period of time.
"If you go to Saudi Arabia, you have to wonder: 'How could this be? How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?' The Saudis say: 'You either believe us or you don't.' And that's the end of the conversation." [See a related report in today's issue of Money Morning that details how higher oil prices are potentially opening up exploration opportunities in Saudi Arabia and off the coast of Brazil.]
New Motorists = Higher Fuel Prices
This decline in productive capacity is bad enough if world demands were holding steady.
But they're not.
As incomes rise in such countries as India and China, so do the number of members of each country's soaring middle class. That enables these folks to buy things – such as cars and trucks."
And sprouting automakers from Shanghai to Mumbai are only too happy to oblige. Carmakers are developing luxury nameplates for the nouveau riche. India's Tata Motors Ltd. (TTM) has been developing reliable, inexpensive vehicles for new car owners: It recently unveiled a low-cost pickup truck that set sales records, and has just unveiled the Nano, a $2,500 car that's believed to be the lowest-cost car on the market anywhere in the world.
Not only will that stoke demand for oil and gasoline; eventually it'll cause the world's auto center to shift from Detroit to somewhere in Asia.
News and Related Story Links:
Jubak's Journal: Why Oil Could Hit $180.
Money Morning News Analysis:
Goldman Sachs Follows Money Morning Prediction That Oil Prices Could Approach $200 a Barrel.
Money Morning Economic Forecast Series:
Outlook 2008: How to Profit When Oil Bubbles Up Above the $100 Level.
Money Morning Investment Research Report:
As Oil Prices Hit Another Record High, Consider These Three Ways to Profit From This Long-Term Gusher.
Money Morning Exclusive Interview (Part I):
Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.
Money Morning Exclusive Interview (Part II):
Jim Rogers: China's Economic Advance is All But Unstoppable.
Tata Motors Ltd. Nano Car.
Morning Investment Analysis:
Where Should We Invade to Bring Down Oil Prices?
Money Morning Political Analysis:
'Axis of Unity' Provides Dollar Dissent at OPEC Summit.
Money Morning Investment Research Report:
Venezuela Says "Adios" to Most Foreign Investment, Making it a Stay-Away Play for Investors.
Money Morning Investment Research:
Two Ways to Profit in Spite of the Ethanol Snafu.
Crude Oil Reaches All-Time High Above $119 on Record Euro.
Goldman Sachs Says Window 'Closing Fast' for Oil Drop.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.