This morning, we attended a presentation by ITG Investment’s lead energy researchers, Judith Dwarkin and Manuj Nikhanj.
The most salient was Dwarkin’s argument that while oil prices may demonstrate even lengthy divergences from its “equilibrium” price, it eventually corrects.
She defines equilibrium price as between 3.3 and 3.5 per cent of global GDP, based on the long-term average through several oil price and business cycles.
To prove her point, she showed a simple plot of Brent crude prices versus GDP, which we have reproduced here.
The big jump at the end of the 1990s coincides with developing markets finding their feet.
At 3.5 per cent of global GDP, she said, Brent would average $80/bbl in 2012 and $83 in 2013. It would only be $90 in 2015. Here’s how you get there.
Use Global GDP 2012(E) = US billion $73,741.362 (from the IMF).
Global oil demand 2012 = 88.874 MMbd
Then (3.5% of $73,741 billion) divided by (88.874 X 366) = $79.35
Again, divergences are likely.
But this is a pretty good — and for consumers, sunny — rule of thumb.