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Wednesday, September 28, 2005

Oil Futures

Nouriel Roubini says the price of oil is sure to go over $100/bbl sometime in the next few years. He argues,

Global demand for oil is growing at about 2.1% per year or about 2 mmb/d (million barrels a day) per year. So, new net supply has to increase by as much just to maintain prices at current high levels. But since existing production fields get depleted at the rate of over 4 mmb/d per year, new production from new oil fields has to be at least 6 mmb/d per year just to ensure that the additional net demand is satisfied.

... So, where will the new 6 mmb/d per year new production come from? We would be very lucky if, between OPEC and non-OPEC producers, we get two thirds of this new production per year available between now and 2010. Thus, based on standard elasticities of demand for oil in face of a highly inelastic medium term supply, this implies that we will oil at $100 per barrel well before the end of this decade.

Professor Roubini is a very smart economist, and so I am reluctant to disagree with him. But as I have posted earlier, citing The Emirates Economist, the Alberta tar sands and the Western US oil shale reserves are potentially gi-normous.

But more to the point: As I write this, oil futures prices over the next five and a half years range from under $67/bbl in the short-term down to near $60/bbl five years from now. If Roubini is right (and for all I know, he might be right), why hasn't his argument been capitalized into futures prices for oil?

Posted by EclectEcon on September 28, 2005 | Permalink


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I note that Noriel is saying "spike" over $100/barrel sometime in the next 3 years. I'm saying 10 years from now the price will not be above $100/barrel. Inflation adjusted.

We both can be right. All he needs, though, is one event that causes a spike.

No, I have not put my money where my mouth is.

What I am doing is counting on the tremendous forces of long run elasticities - and all the behavior incited, on both the consumption and production sides, that lie behind them - to crush prices towards the level of costs in the Alberta tar sands.

Posted by: John B. Chilton | 2005-09-28 9:33:49 PM

The price of Oil sitting at current levels is not due to a shortage of crude or an impending depletion of reserves. The problem is event risk and a shortage of refineries. At about 10 billion a piece and all the enviromental concerns nobody will build refineries.

Opec is not forthcoming with its reserves. I have heard estimates that Saudi Reserves could reach 1 trillion barrels. The Alta tar sands are thought to have between 800 billion barrels to 2.5 trillion barrels of Oil. That would require a market price of about $35.00 a barrel to make it economically profitable. It costs about $12 to produce a barrel from the tar sands.

This needless to say is a complex issue but any speculation on how much oil is in the world is just that speculation. Oh by the way that is what has driven the price through $60.00. Even with the hurricanes it seems some very big money is helping push the price higher than current problems can account for. The rumor is that money originates in the Middle East.

Posted by: Jeff Cosford | 2005-09-29 12:05:44 AM

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