Monday, May 12, 2008

$200 Oil - Why I Don't Believe It....

If you click the above link you'll find an article about an analyst predicting $200 a barrel oil, I don't buy it.

Let me first state that I've said in the past that $120 oil is not probable.....hmmm, can you say WRONG!

Actually, what I said is that oil at $100 a barrel is a bad idea of the oil producing nations as it provides a huge incentive for people across the globe to find legit alternative sources of fuel (recall that last year a scientist figured out how to burn salt water). Even now I'm betting OPEC (while loving the revenue) is getting nervous that the price is high enough to encourage either a major new global exploration of oil (America has been pulling back production - down 40% since 1995, but if gas is $10 per gallon do you think they'll change their mind?) or a the formalizing of previously thought non-legit alternative sources will suddenly be heavily invested in.

$200 a barrel oil will be a long term disaster for the oil producing nations, especially the ones whose economy is run by oil. Unless they take the extra money and invest it wisely to diversify their economy (Dubai), they will soon find that the world will not put up with oil at such a high price. One of two things will happen, more exploration leading to oil flowing from places not previously thought possible (California coast, Gulf of Mexico, Alaska, North Dakota and Canada) or some enterprising young (or old) inventor will figure out a way to run everything that oil currently runs on with something that is cheaper and easier to produce.

If OPEC is smart they'll increase production and try to get a gallon of gasoline down to the $2 range again - Americans are willing to pay that for a gallon of gas without getting upset, but they will not pay $5 or $10 per gallon and if they are forced to it will be the end of OPEC and the oil producing nations as we know it.

We may see $200 a barrel oil, though I doubt it, but in the long term, its bad, very bad for the oil producers.

I think we'll see lower priced oil soon, the middle east wants to keep their monopoly (ok, Cartel) going as long as possible.

Scott Dauenhauer, CFP(r), MSFP, AIF