Are we there yet? The prospects for $100 oil
By Myra P. Saefong
When it comes to the prospect of $100 oil prices, it's still a question of when, not if.
Earlier this year, speculation over a spike past $100 a barrel was fed by terrorist activities, severe weather and political and economic uncertainties. In April, Goldman Sachs even warned of a "super-spike" period that could push oil to $105 per barrel.
But by late August, around the time when crude-futures prices reached a record level near $71 a barrel, MarketWatch's editor-in-chief questioned whether Hurricane Katrina had helped mark the peak for oil. And MarketWatch Columnist Tom Kilgore said a technical indicator may be suggesting an end to crude's uptrend.
"The $100 a barrel was never going to be a near-term expectation without a cataclysmic terrorist attack on a significant oil infrastructure," said Jason Schenker, an economist at Wachovia Corp.
Indeed, that price scenario was "always an exaggeration of a low-probability event," said Michael Lynch, president of Strategic Energy & Economic Research.
When it comes down to it, traders must remember the reason crude reached record highs in late August. "There was a massive natural disaster that caused supply lines to shut down and we're still seeing the impact of," said Schenker. So "it would take something significantly greater than Katrina, Rita and Wilma combined" to get prices to $100.
Crude prices are down about 18% from their record high in Katrina's wake.
Even so, some analysts refuse to relinquish that triple-digit price, mainly because the world is depleting its oil reserves and there's never a shortage of price-supporting events.
"What ever happened to $100 crude? It just got postponed," said Agbeli Ameko, a managing partner at First Enercast Financial. "That is, at least until the next hurricane season or some geopolitical bombshell."
"In this 'peak-oil' and 'terror-premium' environment, the market will remain in reach of the $100 barrier," he said.
Risky access, depleting sources
Traders have been keeping a close watch on domestic and international supplies, but it's important to take a closer look at oil reserves and production to calculate just how much oil the world has left.
There's probably about 1 trillion barrels of oil left worldwide -- and 60% of that is in the Middle East, said Dan Hassey, a senior research analyst for Boca Raton, Fla.-based Gold & Energy Advisor.
"Supplies are so tight and demand is growing and unfortunately, a lot of the supplies we get are [from] some very unstable places including ourselves, as we learned in the last couple of summers of hurricanes," he said.
Of the world's total, Saudi Arabia holds 23% of the proved oil reserves, or about 263 billion barrels, according to a report from the Gold & Energy Advisor, which based some of its figures on an article in Barron's. A total of about 30% comes from Iran, Iraq and the United Arab Emirates.
The Gold & Energy Advisor estimates that based on Saudi Arabia's output of 3.6 billion barrels a year in 2003, the country has about 73 years left before depleting its oil reserves.
The U.S. has only about 11 years before depletion of its proved reserves, according to Gold & Energy Advisor.
Americans "take [oil] out of the ground much faster than anybody else of the major producers in the world ... and we're going through it very quickly," Hassey said.
With the U.S. running out of oil, "that means more pricing power to OPEC," which controls around 65% of the world's oil, said Hassey.
The Organization of Petroleum Exporting Countries is an "oligopoly" -- it can control the supply it has and keep prices high, he said.
And "as people start to realize that we are drawing down our reserves, that is going to give more pricing power to OPEC," he added.
One of the big problems with that: many of the countries in the cartel have oil companies that are controlled by the government and that's the "least efficient, and probably more wasteful way to run an oil business," he said.
Two examples of government-run oil are Venezuela and Iran, where production is "erratic and declining," he noted.
Oil prices certainly won't see any significant relief from falling demand or alternative-energy sources.
True, the high price of oil is slowing demand right now, but investors tend to concentrate on U.S. demand -- which accounts for 25% of the world's oil, said Hassey.
Global demand is falling, but not as fast as U.S. demand, he said. See Commodities Corner on energy demand.
At the same time, there are questions about whether alternative-energy sources will erode demand. See Commodities Corner on biofuels.
But "I don't think we're going to have enough alternative energies at a good price that's globally distributed within the next two to five years before [the] next global expansion occurs," said Hassey.
There is "no really new alternative is on the horizon," said veteran commodities trader Kevin Kerr.
Given all that, "$100 oil is not that far off" -- in 2 to 30 months without a major terrorist act, and 6 to 12 months with a major terrorist attack, said Kerr, who also edits Global Resources Trader, a service of MarketWatch.
"The bottom line is, the light, sweet, easy-to-get/easy-to-refine oil is much harder to lay your hands on nowadays," he said, and that lack of light, sweet crude to refine "will most certainly drive prices higher overall."
So "for those asking 'are we there yet?' -- be patient. It probably won't happen in 2005, but 2006 or 2007 could be another story," First Enercast's Ameko said.