Marilyn Radler
Senior Editor-Economics
HOUSTON, Nov. 13 -- Oil prices will decline as demand for oil from the Organization of Petroleum Exporting Countries flattens or recedes in 2008, says Michael Lynch, president of Strategic Energy & Economic Research.
Lynch told the American Petroleum Institute's Houston Chapter that current oil prices are not sustainable. He predicts growth in non-OPEC oil production over the next 5 years and believes the US has seen a peak in gasoline demand, with car buyers now choosing smaller vehicles.
Although dependent on changes in OPEC output, the oil price Saudi Arabia wants to defend, and the condition of the global economy, price weakness will likely occur as soon as the second quarter of next year, when Lynch sees an oil price of about $70/bbl. He thinks inventory pressures will lead to a sustainable long-run oil price of $40-45/bbl.
The consequences of a price collapse will be that US onshore drilling stagnates, exploration and production in the shallow Gulf of Mexico declines, and a possible pause in oil sands development, Lynch said. High-cost producers will be most affected by a drop in prices, especially those with sunk costs. Also, alternative energies such as biofuels and hydrogen will feel a pinch from lower oil prices, as will exporting nations and refiners.
The entities that thrive despite lower prices will be producers with large cash reserves and governments friendly to foreign investment. But companies spending most of their cash flow now will suffer and become takeover targets.
Lynch also sees a near-term drop in US natural gas prices. A combination of record amounts of gas in storage, a predicted warm 2007-08 winter in the US, a slower economy, and new supplies coming online will depress prices over the next few months, he said.
Contact Marilyn Radler at [email protected].
