Goldman's Murti Says `Peak Oil' Risks Sending Prices Above $105
Goldman Sachs Group Inc. analyst Arjun Murti, who roiled oil markets in March by saying crude may reach $105 a barrel, now says that may be conservative if the ``peak oil'' theory is right and world supplies are running out.
The belief that the world's oil supply is close to an irreversible drop is no longer ``on the fringes'' of the market, said a research report by New York-based Murti, who forecasts oil of $50 to $105 a barrel until 2009. UBS AG analyst James Hubbard, a former oil engineer at Schlumberger Ltd., said an inevitable decline in supply will start sooner and be worse than expected unless investment increases for many years.
A jump above $105 a barrel ``is possible if we don't invest the right amount of money,'' Hubbard said in an interview in London. ``There will be a peak in production earlier than expected, and that post-peak decline will be more dramatic than currently assumed unless there is a sustained increase in investment in oil and gas production, greater consumer efficiency and alternative energy sources.''
While Saudi Arabian Oil Minister Ali al-Naimi and Exxon Mobil Corp. President Rex Tillerson say oil supplies will last for decades, energy traders are increasingly debating the amount of available crude. Oil's two-year jump to about $60 a barrel came as rising demand from China surprised suppliers, who had failed to spend on new pipelines, rigs and refineries.
Investors who back the peak oil theory, such as Boone Pickens, a Dallas hedge fund manager and former oil executive, have fueled the price rally of the past two years, during which oil almost doubled, to reach a record $70.85 in August. Prices ended last week at $58.06 in New York.
The peak oil theory is based partly on the work of M. King Hubbert, a former Royal Dutch Shell Plc geophysicist who accurately predicted in 1949 that U.S. domestic onshore oil production would plateau by about 1970.
Chevron Corp., the second-largest U.S.-based oil company, in its advertising declares, ``One thing is clear: The era of easy oil is over.'' Estimates vary on how much oil remains to be produced and when supplies will peak.
Tillerson in September told the World Petroleum Congress in Johannesburg that a U.S. Geological Survey estimate of 2 trillion barrels of conventional oil reserves still to be recovered is conservative, with the range of possibility as high as 7 trillion barrels. Less than 1 trillion have been pumped already.
Goldman's Murti in March skirted the peak oil debate. In a report last week, the analyst said it's something to monitor.
``It is possible that the peak oil theorists are correct,'' he wrote. ``If so, we think that the duration and magnitude of energy commodity price increases would be likely to far exceed what we are contemplating.'' He couldn't be reached for comment.
More Oil Coming
Without a peak in production, Murti expects the price of New York oil to fall to about $35 a barrel in New York between 2010 and 2014. That matches forecasts from Schroders Plc for $35.50 by 2010 and is lower than Merrill Lynch & Co. predictions for $40 to $45 by the end of the decade.
The debate and high prices are contributing to an increase in investment in new technologies that will help keep oil flowing, said UBS's Hubbard, who wrote in October that some 3 trillion barrels probably remain to be pumped.
Murti ranked third last year among researchers who cover oil and gas companies, according to Institutional Investor magazine.
Goldman, the second-biggest U.S. securities firm, estimates about $50 billion is invested in its commodity index, where crude oil has largest weighting. The bank's view is that oil will average $68 a barrel in New York next year. Prices may stay close to $60 for ``three to five years'' before falling to ``$45 at the most'' by 2010, Jeffrey Currie, the bank's head for commodities research in London, said in August.
The International Energy Agency, an adviser to 26 industrialized nations, said in a 150-page book in September that technological improvements will help increase world oil supplies, dismissing the peak oil theory. The IEA expects $3 trillion of investment for each the oil and gas industries through 2030.
``Most commentators, putting aside the depletion argument, do take the view that at least over that period through 2010 supplies will be made available,'' said John Waterlow, an analyst at Wood Mackenzie Consultants Ltd. in Edinburgh.
Oil-producing nations are seeking to extend the life of their reserves. Norway, which ranks behind Saudi Arabia and Russia in world oil exports, forecasts its production will peak in 2008. Oil and Energy Minister Odd Roger Enoksen in a Dec. 8 interview said he thinks it will come later.
``We had thought we would very quickly see a strong drop in oil production, but now we expect to keep it at a plateau for longer,'' he said.
The biggest questions center around Saudi Arabia, the world's largest oil exporter. The most vocal skeptic of Saudi Arabia is Matthew Simmons, chairman of energy investment bank Simmons & Co. He's author of ``Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,'' in which he argues that fields are about to decline because water injection has damaged reservoirs.
The nation doesn't open its industry to scrutiny. Of known oil reserves, Saudi Arabia holds about a fourth. Minister Al-Naimi in Johannesburg said its holdings may be 200 billion barrels more than a current estimate of 264 billion.