By Halil Cihan Ergul
Goldman Sachs recently said in a research report that oil markets have entered a “super-spike” period that could see prices rising as high as $105 a barrel. “We believe oil markets may have entered the early stages of what we have referred to as a “super spike” period — a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return,” Goldman’s analysts wrote.
First of all, this per barrel figure may not make sense, as we don’t use barrel units in our daily consumption. In order to make sense of this estimate, we can compare it with the prices at a gas station. As of today regular gas per gallon (most preferred gas type in the United States) was $2.29 at Amoco gas station on Hempstead Turnpike.
On the same day, crude-oil per barrel was closed at $53.32. If $105 per barrel estimate comes true, this will represent a 96.92 percent increase in oil prices and we could see gas prices up as much as $4.50 ($2.29 x 1.9692) at the gas stations.
Oil markets have been pushed by strong and stable demand coming from OECD countries along with the growing demand from China and India. Diminished spare production is another reason for pressure in the U.S. market, adding to the fact that no refineries have been built since the late 1970s in the United States, mostly due to strict environmental policies.
Gasoline spending now has a much lower proportion of the U.S. economy in comparison to periods of historical oil crises. According to the same report, the new $50 to $105 per barrel super spike range perhaps conservatively corresponds to gasoline spending in the United States that reaches 3.6 percent of forecasted the GDP, 5.3 percent of consumer expenditures and 5 percent of personal disposable income.
Goldman also pointed out thin spare capacity in the energy supply chain, and long response times for bringing on supply additions contributes to higher prices. On the other hand, robust demand in the United States and in developing heavyweights China and India is still in an upward trend despite the recent rapid increase in energy costs.
The negative expectations coming from the sector is definitely a bad news for U.S. markets right before the driving season when prices are expected to rise highest starting on the Memorial Day holiday in late May, the beginning of the busy U.S. summer driving season which ends on Labor Day in September.
One of the reasons for the expectations of high oil prices is geographical turmoil in key oil countries. Political problems, especially in Middle East, keep foreign oil companies from developing host country resources in a timely manner. This causes limited supply growth from areas that could otherwise meet oil demand growth at lower prices.
Plus, increased geologic maturity in many of the traditional areas of oil supply, as well as service and materials cost inflation, has driven an increase in oil prices. Sticking with this maturity problem, we can say that The United States along with Canada will experience this problem in the supply of natural gas as well. According to BP Statistical Review of World Energy 2002, The United States and Canada have 3 percent of world natural gas reserves. The lifetime of these reserves is only nine years.
These two countries have no dependence on natural gas imports as of today, according to IEA World Energy Outlook. But the same report also states that, as of 2030, 18 percent of natural gas consumption in the United States and Canada will depend on imports. Therefore, as existing natural gas reserves are going to mature in a relatively short period of time, alternative strategies should be determined in a time sensitive manner.
Returning to oil prices, we are most likely to see prices keep their upward trend throughout the 2005 driving season and should wait until the end of this season to see whether oil prices will really reach to the speculative $105.