Interesting Thoughts on Oil From This Week’s Barron’s

Have no fear, this isn’t becoming an oil blog. I promise! It’s just that I tend to think about certain subjects for days at a time and one thought leads to another and before you know it, I’ve blogged about the same thing for several days in a row.

This week’s Barron’s had an interesting interview with Arjun N. Murti, Energy Analyst, Goldman Sachs ($) about where he thinks oil prices are headed. Here’s some of the interview that I thought was interesting:

Murti sees energy in the later stages of a “super spike,” in which prices rise to a point where demand drops off. In a note last month, he wrote that “the possibility of $150-to-$200-per-barrel oil seems increasingly likely over the next six to 24 months.”

Barron’s: What do you make of Friday’s big surge in oil prices?

Murti: There have been a number of bullish fundamental data points recently that contributed to the rally. These include further declines in U.S oil inventories announced June 4, the announcement of a decline in Russian oil production in May, and recent comments that Mexico expects further meaningful declines in oil production over the rest of this year.

Barron’s: So, essentially, there is constrained supply, along with increasing demand?

Murti: Demand has been consistently growing. On the supply side, we don’t subscribe to the peak-oil view. We don’t think the world has run out of oil.

We do think that the places that have large quantities of recoverable oil, notably Saudi Arabia, Iraq, Iran, Venezuela and Russia, aren’t on track to grow their supply aggressively. It is growing at a very moderate rate, and so the remaining oil resources are concentrated. And, to some degree, high prices are disincentivizing some of these countries to either open up their industry or spend the money themselves. [emphasis mine]

Barron’s: What actually is keeping them from producing more?

These countries don’t need the incremental revenue. They’re getting the revenue through price; they don’t need it through volume. It means they have sufficient capital to try and develop their oil industry on their own. With high prices, they don’t need Western capital. Venezuela, where Western companies’ assets have been expropriated, is a good example.

This is WHY we need to be doing all we can to reduce our need for foreign oil! These countries have no desire to increase output that will drop the price of oil!

Murti goes on to say that he expects oil to spike at somewhere around $200 per barrel, which means gas prices at around $5.75 per gallon. This is a spike and not something permanent. In fact, in the long run (like 20 years or so), they expect oil to go back to $75 a barrel. I’d like to know where he came up with that number and unfortunately Barron’s didn’t ask him to clarify.

Anyway, at $5.75 a gallon, my family would be spending $700 per month on gas. OUCH!

Politicians and Oil

The price of oil has been on my mind a lot lately. This morning’s WSJ had an article about how Congressman Bart Stupak is looking for the villian responsible for high oil prices. He claims oil prices are being manipulated by trading houses and futures markets. He may be right but I think he and the rest of congress must share in the blame for high oil prices for two reasons:

1. They won’t allow our companies to drill here in the U.S.


2. They aren’t investing enough in other sources of fuel like biofuels.

Why can’t we allow companies to drill in the U.S. if they promise to do it responsibly AND require them to invest heavily in other fuel sources?

I have no idea how much oil is available here in the U.S. Some argue that there’s very little while others say there’s a lot. I don’t who to believe. All I know is that I’m tired of watching oil soar past record after record while our politicians do nothing but make it look like they are doing something.