According to a July 16th Bloomberg article, Philip Verleger, who correctly predicted that oil prices would exceed $100 per barrel in 2007, has now predicted that due to the huge surplus and OPEC overproduction we now have, it will fall to $20 per barrel yet this year.
A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said......“Prices would be much lower today, but for the very large incentive to build inventories,” Verleger said. “You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation” that will no longer be the case.
The last time crude was at $20 was February 2002.
What would the impact of $20 oil be for our economy?
Since the current crude price is approximately $64/barrel now, that would be a 68% reduction in price. At a 2008 usage of 7,136,255 barrels per day, in rough terms, this would go from costing our economy $166,702,916,800 per year to $52,094,661,500, or save us an "energy tax" of $114,608,255,000 per year, or close to 1% of our annual GDP. (We do produce 40% of our own oil, so the savings is actually less in respect to our GDP.)
But, given that 60% of the savings gets subtracted from our trade deficit; the price of oil is embedded in most aspects of our economy; and that for a large sector of our population who spends a large percent of their budget on fuel, the impact would be greater than that 1% reflects.
Lastly, the $20 price would have huge implications for the oil exporting nations and for our future energy supply, as less and less reinvestment in the way of future oil production projects would be done.
Disclosure: No oil stocks or ETFs owned.
