Oil Prices Will Pierce the Comfort Zone, But When?
Crude oil prices rose by more than five bucks last week, the biggest percentage gain since the beginning of the year.
The rise to nearly $88 per barrel resulted in warnings from AAA, the Lundberg Survey and other sources that prices at the pumps—already at $2.80 on average in the U.S., and at $3.15 in California—will rise further as we approach Thanksgiving. While higher gas prices are not exactly great news for consumers, sales of hybrids and other fuel-efficient cars rise and fall with the price at the pumps. Sales of hybrid cars in October rose to a five-month high. (We’ll be posting our monthly hybrid and diesel sales dashboard later today.)
Oil prices slipped back to $86.56 on Monday, confirming the view of many analysts who say the price of oil is range-bound between about $70 and $90. According to this view, the price will rise and fall given macro-economic conditions (mostly a weak dollar); investor optimism about future oil prices; or news about attacks on oil supplies in Nigeria and elsewhere. But only within a reasonable range—unlike the run to $147 a barrel in 2008, which led to $4 gas in the United States.
OPEC agrees. The Dow Jones reported that Saudi oil minister Ali Al-Naimi said the crude oil price had found its “comfort zone.” Similarly, the International Monetary Fund doesn’t see the rise in oil prices as a threat to the global economic recovery.
Only For a Time
Charles Maxwell, a senior energy analyst at Weeden & Co, agrees that current oil prices have range limitations. Maxwell was interviewed on Index Universe, a leading source of information about index funds. “We think prices will stay within a band roughly between US$67 – US$87 a barrel,” Maxwell said. “When it gets up toward $87, it seems to retreat, and when it gets down toward US$67, it seems to take off again. That’s because supply and demand are in rough balance.”
Maxwell doesn’t see that picture changing much in the next year. But as the global economy recovers, and the use of cars rapidly expands in China and India, then the price of oil will break its boundary starting in 2013. Combine that with a plateau of oil production by 2015 – 2017, according to Maxwell, and oil will shoot up to $130 to $150 per barrel. From there, if demand increases even by a single percentage point, and production similarly slightly declines, then “we’ll really be in a fix,” said Maxwell. “At that time, I’m looking at $300 a barrel in money of the day.”
Is Maxwell a smart analyst or a peak oil alarmist? Will we see $300 a barrel in about five years? Nobody knows for sure. But if Maxwell is anywhere close to being right, the economics of driving a hybrid or electric car will radically shift. That’s why many of today’s hybrid and EV buyers see their purchase as an insurance policy against a future spike in gas prices—a jump that will make last week’s blip seem like child’s play.