Saturday, June 28, 2008

Near $130 now, will oil prices rise or fall?

Crude oil traders and energy company executives seem to disagree about which way oil prices are going. Commodity traders in New York, London, and elsewhere apparently believe the sky is the limit, judging from the current run-up that has given us $133 oil in recent days. Conversely, a recently-released KPMG survey of oil and gas industry executives indicates that most believe the price-per-barrel of crude oil will drop below $100 by the end of the year.

So, who are we to believe?

KPMG surveyed 372 financial executives from oil and gas companies in April 2008 and made the results available on May 9. Here’s what they had to say:

55% think that crude will drop below $100/bbl by year’s end;
21% think the price will close between $101 and $110;
5% think between $111 and $120; and
9% believe it will close at above $120.

Bill Kimble, executive director of KPMG’s Global Energy Institute, noted, “The combination of traders moving resources into commodities and the weak dollar has had a signifi cant role in the surge in pricing in recent weeks. However, in addition, there are underlying issues in the energy industry, such as escalating energy demand in emerging markets and declining oil reserves, which will continue to contribute to upward pricing pressure for years to come.”

Last month, Goldman Sachs, one of the world’s most infl uential investment banks, hiked its oil price forecast for the second half of 2008 to $141/bbl, up from its previous forecast of $107. With steadily escalating prices and significantly higher prices at the retail level for gasoline and diesel, it would seem some consumers might begin to change their habits and reduce the number of miles they drive to conserve fuel or begin to buy more fuel-effi cient vehicles. Actually, there is anecdotal evidence that both are occurring.

However, even if Americans suddenly decide to become as fuel-effi cient and eco-minded as, say, most Europeans, there is steadily increasing demand for energy in emerging economies such as China and India that will tend to prop up oil prices.

Legendary oilman T. Boone Pickens recently told CNBC, “85 million barrels of oil a day is all the world can produce, and the demand is 87 million. It’s just that simple. It doesn’t have anything to do with the value of the dollar.”

If Pickens is correct in his facts, we simply aren’t producing enough oil to meet global demands. However, the dollar has fallen 12% against a broad range of other world currencies over the past year, including 15% against the euro. So it’s likely the relative value of the dollar has something to do with the price of oil.

Most KPMG survey respondents overwhelmingly felt that opening up domestic drilling on public land, in the Arctic National Wildlife Reserve, and in offshore waters that are currently offlimits to drilling is our best option for increasing oil and gas production and enhancing US energy security.
What do you think about oil prices and opening up more land to domestic drilling?


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