Bob Tippee
Editor
A jolting prediction from Goldman Sachs Group Inc., New York, brings attention to the distinctions between interesting and important questions in a strong oil market.
Equity analysts at Goldman Sachs, which has a large energy-trading operation, on Mar. 31 lifted the upper limit in their range of possible crude oil prices to $105/bbl from $50/bbl.
Mention of a three-figure crude price spooked the market. The May contract for US light, sweet crude on the New York Mercantile Exchange closed on the day of the Goldman Sachs report up $1.41/bbl at $55.40/bbl. During the trading day, the crude price reached as high as $56.10/bbl (OGJ Online, Apr. 1, 2005).
Authors of the Goldman Sachs report think spare production capacity will remain low by historic standards for many years. As a result, they say, crude oil has entered a period of what they call superspikes, with prices subject to wild upswings.
Goldman Sachs might be right. Unadjusted for inflation, oil prices have entered uncharted territory. One of the reasons surely is the extent to which relentlessly rising demand has eroded normal cushions of spare production capacity, as Goldman Sachs mentioned. Other capacities, such as refining and shipping, are under strain. And other influences are at work, prime among them a period of weakness in the US dollar, the currency of oil trade.
Demand, meanwhile, continues to rise. A big part of the reason is China's commodity buying spree.
Yet something else, which nobody wants to mention, is evident. The well off of the world can afford oil-product prices at recent levels, grumpy though they may be about them.
During the many years in which oil prices languished, incomes grew in the oil-consuming industrialized world. So oil consumption grew. Inevitably, demand has caught up with production capacity.
The test now is the relationship between oil price and enlarged oil-user income. What price makes heavy oil consumers cut their oil buying?
The question implicit in the Goldman Sachs report—How high can oil prices go—is interesting, mainly because nobody knows.
But the important question is this: How high can oil prices stay?
(Online Apr. 2, 2005; author's e-mail: [email protected])