Chairperson's message for May 2011
Oil (Prices) on the Brain
If a person was to read through the previous articles I have written for this space, they could get the impression that I am interested in, perhaps even obsessed with, the price of crude oil. Well, I do find it an interesting subject.
In a previous column, I mentioned an incident when I was working at Union Oil Research: I wrote a short article for an in-house newsletter about predicting the price of crude oil. My conclusion was that no one had demonstrated that they could do it. Shortly after that article appeared, I learned that (1) there was a group of people at Union Oil Center that was supposed to predict the price of crude oil, and (2) that group reported to the same Vice President that my boss did. I learned something from that experience, but I didn’t change my conclusion – the price of crude oil is fundamentally unpredictable.
In another column, I expressed my thankfulness for the high and stable price of crude oil during the year 2010:
Well, in hindsight, looking at eleven months, as I did with the preceding graph, is too small a view. Let’s look at a bigger picture:
“Stability” isn’t the first thought that comes to mind when looking at a bit over 5 years of data on crude oil prices. With a high price of over 140 dollars per barrel in early 2008 to a low price near 40 dollars per barrel only a year later is quite a change. No one working in the oil and gas business needs a detailed explanation of how that kind of price change challenges the planning process.
The relatively stable prices during 2010 haven’t stayed with us, either. Recent prices have hovered near $110 per barrel, but the upward trend since the start of 2011 seems obvious. What will prices do in the remainder of 2011? I have no idea.
Over 20 years ago, when I wrote that article for the Production Research Newsletter, price forecasts were a common feature in oil & gas industry magazines. That is no longer true, and I think the reason is that after being embarrassingly wrong a few times, people quit making (or at least quit publishing) crude oil price forecasts.
There is a difference between weather forecasting and climatology. Despite the fact that the local television weatherperson is glad to present a 7-day forecast, accuracy is very poor for any weather forecast beyond 96 hours. But, we can be pretty sure that it will be hot in Houston during July and August, right? And it doesn’t take much knowledge to predict that it’s likely to rain about 40 inches in western Oregon in any given 12-month period.
In a similar way, no one has demonstrated the ability to predict oil prices over a period of a few months or a few years. But, with energy demand increasing in developing countries such as China and India, and crude oil coming from smaller reservoirs in more difficult locations, such as deepwater west Africa, it isn’t difficult to envision an era of higher energy prices in the next few decades.
Higher energy prices are good for the oil and gas producing companies, of course. Rising energy prices can be a problem for the national economy (I am old enough to remember 1979 and 1980, and “stagflation.”) But higher energy prices will have benefits beyond the oil industry: alternatives such as plug-in hybrid vehicles become much more attractive at high gasoline and diesel prices.
So here is a modified conclusion: The price of crude oil is fundamentally unpredictable, in a “weather forecasting” sense; but in the long term, “climatology” sense, it is a good bet that energy prices will rise over the next few decades. It’s a good concept to keep in mind for investment decisions, choosing family vehicles, or helping ones grandchildren in selecting their careers.
But I still have no idea what the price of crude oil will be by the end of this year, and I don’t really believe that anyone else can forecast it, either. PS: Don’t let any of the preceding keep you from taking a guess in the LASPE Crude Price Challenge.
Mike Utt
LASPE Chairperson 2010-2011
mikeutt@roadrunner.com
PS: Don’t let any of the preceding keep you from taking a guess in the LASPE Crude Price Challenge