Goldman’s primary oil analyst, Arjun Murti, is smart enough not to grant many interviews these days (why provide fodder for lawsuits?). But his colleague, commodities analyst Jeffrey Currie, is happy to defend the firm’s oil-to-$150-to-$200 view. WaPo:
“World GDP wants to grow at 3.8 per cent, whereas the best we can come up with for [oil] trend supply growth is 1 per cent,” he said. “So something has to give. And that means prices have to rise to curtail demand growth.”
Speculators driving prices higher? Please. This is a demand-driven spike, Currie says, which makes it different than the ones in the 1970s:
When prices soared in the ’70s, the Iranian revolution and subsequent Iran-Iraq war took 10 per cent of the world’s oil off the market. Demand had to be trimmed because supplies were cut.
“This time around, supply didn’t collapse like the ’70s. Rather what we saw was demand in emerging markets exhausting the capacity of the system to deliver or produce oil. That separates this period from what we’ve seen before.” It is, he says, “much more of a demand shock this time around.”
And it’s not just that there’s not enough supply: Politics is also playing a role:
- Canada forbids the use of nuclear power that could cut the cost of tar-sands production;
- Saudi Arabia is closed to foreign direct investments in oil;
- Venezuela has effectively nationalized their oil resources, and more governments in the area threaten to follow the same path; the Mexican constitution forbids foreign investments in energy; and
- Kazakhstan has restrictions to the employment of non-Kazakh engineers.
As with any bold position, Goldman’s has drawn cries of “irresponsible!” and “outrageous!” (Can you blame Murti for hiding?) Lehman analyst Ed Morse is good enough to describe Currie’s reasoning as “responsible and analytically coherent,” but he still thinks it’s wrong:
Currie is too pessimistic about future supplies and exploration costs, Morse says. Morse says that new deepwater drilling equipment will break the bottleneck slowing exploration of promising areas offshore Brazil, Alaska, Norway, West Africa and northwest Australia. “The thing that has stymied new discoveries most is not acreage so much as the ability to explore it,” he says. There are 70 deepwater drilling rigs in the world, according to oil service industry sources, and about 70 under construction.
Morse says new equipment will stabilise exploration costs, meaning that today’s prices are more than adequate to provide incentives for new production, even with political obstacles in oil-rich nations and with OPEC countries keeping some supplies off the market. During testimony last week before Congress, Shell Oil President John Hofmeister said that a price of crude oil “somewhere between $35 and $65 a barrel” was probably adequate.
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