Maurizio – Omnologos

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Oil Prices are bound to fall soon

with 3 comments

Oil Prices are bound to fall soon…and for reasons that will appear obvious in hindsight (so why not spell them out now?):

  • Behind the recent price hikes for crude oil there is a combination of transient causes such as the Iraq fiasco, and the herd mentality that has brought many people into the Commodities markets and convinced them to buy oil alongside everybody else. When those causes will deflate, so will the oil price
  • Higher prices stimulate more research into how to extract more oil. When the market will find again its sanity, higher supply will mean lower prices.
  • Higher prices stimulate also the construction of additional refineries. These take several years to come online, and will crash the price of oil when they’ll all do at the same time: just as those miles and miles of communications cable laid down during the Internet boom of the 1990’s are behind today’s cheap cybersurfing and free worldwide calls,
  • The possibility that oil is costlier because we have just reached a peak in production capabilities is remote. Why now? Why not 10 years ago, or 20 years in the future? Why would it happen so suspiciously close to 9/11 and the crises that have followed?

The real difference this time around is that all those predictions of future doom-and-gloom will be forever available on the Internet, perhaps for a good laugh when “experts” will try to recycle themselves in the future into the “oil is a practically inexhaustible resource” camp

Written by omnologos

2006/Aug/07 at 00:03:59

3 Responses

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  1. Sure oil prices will fall, but –
    (a) They will hit $100/barrel or more first.
    (b) They will never go below $40-50/barrel again.


    2006/Aug/07 at 08:03:45

  2. Agreed on the $100, but why give them such a high lower bound? 10 or 15 years from now, the price is anybody’s guess


    2006/Aug/10 at 22:58:58

  3. here what “” says about this:

    Really, Really Cheap Oil
    Christopher Helman, 10.02.06

    Gasoline for $2? Michael Lynch says those good old days are just around
    the corner.

    Don’t sell that SUV just yet. Oil, at a recent $66.50 a barrel, will
    fall to $45 by mid-2007 and could dip briefly into the 20s in 2008.
    Sometime next year you are going to see a $1.95 price on a gas pump.

    So says Michael C. Lynch, 51, president of Strategic Energy & Economic Research in Amherst, Mass. He swears he hasn’t been inhaling fumes. His reasoning: New supply, coming online from all corners of the world, is more than ample to satisfy growth in demand and sufficient even to withstand an embargo against Iran, which produces 3.75 million barrels of oil a day. Lynch argues that the threat of disruptions–nuclear
    brinkmanship, war, terrorism, hurricanes, pipeline corrosion–has
    larded oil prices with a $20-a-barrel risk premium. As these perils
    recede, oil prices will fall.


    Longer term, Lynch says, there are even better prospects for cheap oil.
    Near-civil war in Iraq, a dangerous standoff with Iran, Arab- Israeli
    tensions, ethnic and religious strife in Nigeria, anti-American
    nationalism in Venezuela: Rarely have so many volatile events
    converged. This, too, shall pass, Lynch believes. “Ten years ago the
    world was pretty much at peace,” he recalls. “Right now it seems like
    there’s unrest in every corner of the globe. But that doesn’t mean it
    will continue forever.”

    A return of 2.5 million bpd worth of production in the trouble spots
    would satisfy six years of growing demand from both China and India.
    Even better, India should be able to supply more of its own oil,
    considering the estimated 3.5 billion barrels of recent discoveries in
    once unexplored basins in Rajasthan.

    One last piece of hopeful evidence. Despite his rejection of
    psychology, Lynch does try to read the minds of large oil companies.
    Even after two years of high prices, he notes, they won’t invest in a
    project unless it promises solid returns at less than $40 a barrel.
    That tells him that if the petrol giants thought oil prices were going
    to stay high they would hold on to more of their profits to invest in
    more exploration acreage and megaprojects. But they’re not. This year
    ExxonMobil (nyse: XOM – news – people ) and BP will return to
    shareholders more than $40 billion in dividends and stock buybacks.



    2006/Sep/26 at 23:02:11

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