How Low Can Crude Oil and Gas Go?

Back when oil prices were still well over $100 per barrel, I wrote in Forbes magazine that they were likely to fall. I thought the global slowdown and the rapid change in driving habits would bring oil down to about $70. Of course, we've already fallen well below that mark. Crude is now selling for less than $50. Gasoline prices have also plunged. According to the AAA Fuel Gauge Report, the national average retail price for regular unleaded gasoline is currently $1.93 per gallon.

It would be nice if prices were falling because the world had discovered a lot more oil. Unfortunately, prices are falling because demand is being destroyed. Much of the demand destruction is due to the global economic slowdown. In particular, people are driving less in the U.S. They are also driving more efficient cars. U.S. auto manufacturers are struggling in part because no one wants to buy a gas guzzler anymore. The Honda Civic is suddenly chic.

Other countries are being impacted as well. Europe and much of Asia are in recession. Although demand is still growing in China, it is growing at lower-than-expected rates.

So how low can oil go? It all depends on the severity of the global recession. It also depends on how serious we remain about alternative energy. Plug-in hybrids and all-electric vehicles seemed to make economic sense when oil was at $140 per barrel and $5 gasoline was within sight. But how many drivers would be willing to give up their internal combustion engines if gasoline is expected to remain below $2 per gallon?

Not long ago, no one seriously thought we'd see $40 crude oil again. However, now it appears that we'll see $30 very soon.

Comments

[socrateazz:]

I know momentum is down on many commodities. people expect trends to continue. I could see oil as low as $40 a barrel to as high as $150 per barrel in the next year. I am no expert on the subject. But if a small % change in demand can cause a 300% reduction in price then there is more of an effect caused by perception than actuallity.

2008 Nov 24 04:12 AM

[socrateazz:]

guess I said that wrong 66%

2008 Nov 24 04:14 AM

[MattB:]

Oil prices below $50-60 spell disaster for many of the primary producing countries' economies - notably Middle East, Russia and Venezuela. Geopolitics says the price cannot stay below that level for long without increasingly desperate measures to underpin the price. I agree that the spot price is driven more by perceptions and speculation than fundamentals - $30 makes no more sense than $150 did (although I think the latter is a truer reflection of the supply/demand balance once the global economic correction settles down). Looking beyond the violently swinging price pendulum, I think a realistic price target for 2009 - assuming there are no more major nasty suprises in the economic closet - is in the $65-80 range.

2008 Nov 24 08:35 AM

[john s. gordon:]

oil price is down because speculators/hedge funds discovered that they had to unwind their 30/1 overleveraged positions.
> jack

2008 Nov 24 08:36 AM

[Ferdinand E...:]

Well Socreteazz, I am an expert on the oil market, and I remember when writers on Forbes were trying to make Steve Forbes happy by agreeing with him that the oil price was going into the tank. In one article in Forbes an author agreed with Mike Lynch that the oil price was going to fall below $20/b.

As for oil prices below $50-60/b spelling disaster for one country or another, that doesn't make any sense at all to me, because I can remember when the OPEC countries were hoping against hope that the oil price would reach $28/b - which was the upper limit of what they defined as their optimal range.

Moreover, it is NOT a bubble or speculation that took the oil price to above $100/b. It was, as this year's Nobel prize winner in economics confirmed, SUPPLY AND DEMAND, although speculation might have been somewhere in the picture, though not nearly as much as certain people believe. And it was supply and demand that moved it to its present position, and will take it back up when the global macroeconomy is put back in order - whenever that might be.

By the way, plug-in hybrids and electric vehicles are an important part of the transportation future, but they won't be in time to keep the oil price from escalating again after the business cycle turns up. To bring that about Michael Moore almost has the right idea, which is a Manhattan-TYPE project.

2008 Nov 24 10:14 AM

[retired358:]

One of the reasons crude may be down over the past 3 months (besides lower demand) is that Mexico hedged about 1/3 of its 2009 production (export vol.). When about 330 million additional bbls. are essentially sold into the market over a short period of time, it should have a very negative impact on price.

2008 Nov 24 10:18 AM

[The Proclaimer:]

Last August I said that Crude would have to go below $70 just to keep the Bio-fuel people off the market. I know, I know Algae bio-fuel is not crude but it dose not have to be crude to displace crude in some applications.

Now that the CLEAN COAL TECHNOLOGY is here (but not yet in use), the people that discovered this miracle process, have stated that hydrogen and carbon fibers are the main products of this process. It is a new game now! That said, The 64 TRILLION DOLLAR QUESTION is not how low will crude go but WHAT THE WORLD WILL DO WITH TONS & TONS OF CARBON FIBER AND HYDROGEN that will be available? Oh Yeah THAT'S ALL THE WHILE CO2 as well as all of the rest of GHGs never make it to the Environment. That is IF this CLEAN COAL / HYDROCARBON TECHNOLOGY process is used. I have my ticket do you?

2008 Nov 24 05:31 PM

[The Proclaimer:]

Fred: Your Manhatten Project may already be here. Check out Shai Agassi's interview:


betterplace.com/press-.../

On Nov 24 10:14 AM Fred Banks wrote:

> Well Socreteazz, I am an expert on the oil market, and I remember
> when writers on Forbes were trying to make Steve Forbes happy by
> agreeing with him that the oil price was going into the tank. In
> one article in Forbes an author agreed with Mike Lynch that the oil
> price was going to fall below $20/b.
>
> As for oil prices below $50-60/b spelling disaster for one country
> or another, that doesn't make any sense at all to me, because I can
> remember when the OPEC countries were hoping against hope that the
> oil price would reach $28/b - which was the upper limit of what they
> defined as their optimal range.
>
> Moreover, it is NOT a bubble or speculation that took the oil price
> to above $100/b. It was, as this year's Nobel prize winner in economics
> confirmed, SUPPLY AND DEMAND, although speculation might have been
> somewhere in the picture, though not nearly as much as certain people
> believe. And it was supply and demand that moved it to its present
> position, and will take it back up when the global macroeconomy is
> put back in order - whenever that might be.
>
> By the way, plug-in hybrids and electric vehicles are an important
> part of the transportation future, but they won't be in time to keep
> the oil price from escalating again after the business cycle turns
> up. To bring that about Michael Moore almost has the right idea,
> which is a Manhattan-TYPE project.

2008 Nov 24 05:40 PM

[jepittman:]

Oil and the stock market have been pretty closely correlated recently. I would expect that to continue. I'm expecting a bounce in both.

2008 Nov 24 06:09 PM

[Tony Petroski:]

Supply and demand has little to do with oil going from $70 a barrel and then up to $150 a barrel and then back down to under $60 a barrel. The demand in this case has been declining in the U.S. for more than two years at the very time that the cost was gyrating. Speculation pushed the price of oil far beyond what could be sustained by the demand and now we are seeing the low end of that same process. Trends go too far and then overcorrect. The public has got to be mystified that a decade could go by with little real (inflation-adjusted) upward movement in prices and then take off like a rocket while everyone was cutting back. It's fun, though, to see the price collapse.

2008 Nov 24 08:13 PM

[SeekingTruth:]

There are different elements to demand (and supply).
There is "speculative " demand.
There is "operating" (or working demand) which is the element quantity required for our reservoirs, pipelines, and in transit quantities.
There is "consumption" demand which is the amount we are actually burning/using every day.
Add all these up and we have "Total "demand.
"Speculative" demand has downward pressure to fall to "operating/demand" levels, and "operating" demand has continuous downward pressure to fall to "consumption" demand levels. A cascading downward pressure if you will, in normal times. In abnormal times, with or without increased consumption, speculative (speculators) and operating demand (diistributors and wholesalers) take the upper hand and drive prices UP.
This does make the amount we are actually consuming (consumption) the critcal element, and we must make every effort to reduce it.
A similar case can be made for the supply side of the equation, but it is more detailed and complicated.
I am not an oil (or energy ) expert in the slightest, but I know these things.

2008 Nov 24 11:39 PM

[Ferdinand E...:]

It's easy to say that speculation is the cause of the big rise and fall of the oil price, but proving it is another matter. On the contrary, I never have any difficulty proving that speculation is not the reason, but unfortunately for anyone to understand the proof they need a background in elementary finance theory or, even better, an open mind.

The chief economist of a major investment bank tried to explain to me that although supply and demand was the largest factor in the price movement mentioned above, speculation played a big role. To back this claim he gave me some information on 'open interest' in the oil futures market. Unfortunately, the ratio of open interest to physical supply and demand proves just the opposite, but I saw no reason to belabor the issue. I can mention however that if one of my students made the wrong claim after one of my killer lectures, he or she would find themselves facing a failing grade if they didn't straighten up.

And by the way truth seeker, you have taken something that is very simple and made it complicated, but you are not completely wrong. .

2008 Nov 25 07:19 AM

[Marcus Aure...:]

I too suspect CL has overshot its sustainable low. I saw some data the other day giving figures for what petroleum producing nations need to make producing oil pay or pay for the nation. Saudia Arabia's threshold was about $50.00/barrel. The UAE was at $20.00/barrel and other nations (e.g. Russia and Iran don't recall seeing Venezuela on the list) were up at $70 and even higher.

Ex-Patriates in the Middle East are now worried their host nations will start taxing their incomes. Two events would typically trigger such thoughts in the governments of the Middle East weak dollar & low oil prices.

I expect CL to go sideways for a month maybe two months and then rise again to meet the summer driving season. However, I do not expect prices to approach last summer's highs, unless of course, some sort of major disaster (natural or otherwise) hits the energy production chain.

2008 Nov 25 12:04 PM