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Oil Prices are bound to fall soon

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

3 replies on “Oil Prices are bound to fall soon”

here what “Forbes.com” says about this:

http://www.forbes.com/forbes/2006/1002/098.html?partner=rss

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.

[…]

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.

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