BIKE: New conventional wisdom emerges

[Roger Baker]

$100/barrel oil? Not really so bad, since there are 42 gallons per  
barrel it equals something like $2.50 a gallon fuel and state and  
federal taxes add something like 40 cents, so this is only $3 per  
gallon in the USA. By getting a used Toyota, shopping at WalMart, and  
giving up fast food, and buying Chinese everything, life can go on,  
even as the prices of everything moved by truck keeps rising.

We should get a strong whiff of the future at the end of 2005 when  
heating oil costs spike demand to 86 million barrels/day; probably  
more than the world can produce.

The real problem is it keeps getting worse forever, and it doesn't  
take into account the likelihood of a sharp fall in Saudi production  
due to overproduction of its tired super-giant fields and sour crude  
refining bottlenecks. Nor does it take into account that the USA is a  
deadbeat nation running up a $2 billion/day bar tab to support its  
habit. When the dollar finally collapses, $3/gallon gasoline will  
seem cheap.  -- Roger

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pid=10000039&cid=lynn&sid=agwqhJ53RMOU>


Are You Ready to Sign Up for the $100 Oil Club?: Matthew Lynn

May 4 (Bloomberg) -- The club of people who say that oil is headed  
for $100 a barrel is growing steadily.

Are they right or is it just another of those outlandish financial  
predictions to be filed with the fanciful forecast in 1999 that the  
Dow Jones Industrial Average may reach 36,000 within five years?
The price of oil has certainly been climbing. In New York, it rose to  
a peak of $58 last month, from $38 a barrel in May last year. It is  
now hovering near $50.

To some analysts, the market is taking a short pause for breath in  
what may be a bull run lasting a decade or more.

At the bar of the $100 Oil Club, you can certainly find some  
respectable company.
Last week, Matthew Simmons, an energy adviser to U.S. President  
George W. Bush, said at a conference in Edinburgh that oil production  
was close to its peak, and the price may reach $100 or more within  
three years, according to the Guardian newspaper.

The same message was delivered in March. ``Simply to sustain the oil  
system and start to modernize what's becoming a very old system, you  
are going to have to have prices up somewhere in the triple digits  
per barrel or you don't create enough revenue to be plowed back to  
make the system work,'' Simmons, who heads Houston- based energy  
investment bank Simmons & Co., told Bloomberg News.

At the end of March, Goldman Sachs Group Inc. caused a stir with a  
prediction that oil may reach $105 in the next few years. Its  
previous upper limit was $80.

$101 in Five Years

A similarly bullish view has been pushed by Jeffrey Rubin, chief  
economist at Toronto-based CIBC World Markets Inc. ``We calculated  
the market clearing price that will align future demand with  
supply,'' he said in an e-mailed response to questions. ``Those  
prices are $61 for 2006, $70 for 2007, and ultimately $101 for 2010.''

Shock predictions are a feature of any bull market -- and oil is no  
exception. Many of them end up leaving their authors looking foolish.  
Jim Glassman and Kevin Hassett's 1999 book ``Dow 36,000: The New  
Strategy for Profiting From the Coming Rise in the Stock Market''  
probably isn't being rushed into a fresh edition by its publishers  
right now. And Henry Blodget, the former star Internet analyst, may  
regret his 1998 prediction that Amazon.com Inc. shares would reach  
$400 within a year. They are now trading at about $33.

London Share Sales

Yet that doesn't mean the predictions were worthless. They asked a  
serious question: Are we at the foot of a rising curve?

In any bull market, people get carried away. Lots of predictions are  
made and almost everyone hops on the bandwagon. Traders like nothing  
more than a buying frenzy. When they see what looks like a one-way  
bet, they want to be on the right side of it.

Evidence of that can be seen in the rush of oil-prospecting companies  
selling shares in London right now. Gulfsands Petroleum Plc, Monitor  
Oil Plc and Gasol Plc have all been busy with listings. The  
extravagant predictions of a continually soaring oil price may well  
be part of the same frothy, bull market. Indeed, it might not be long  
before some bright spark decides to make a splash with an outlook of  
$200 a barrel. In the forecasting business, you have to keep pushing  
higher to hold your audience.

Against that, the bears who attribute the oil-price increase to hedge- 
fund speculation and demand from China are sounding slightly hollow.  
The market has been rising for more than a year. That is hardly just  
a blip.

Oil Bulls

The price of anything will rise until it either becomes so expensive  
that people stop buying so much, or else more supply comes on stream.  
That point has yet to arrive in the oil market. ``Based on what we've  
seen to date, there hasn't yet been much of a substitution response  
from consumers,'' CIBC's Rubin said. ``For example, you would be hard- 
pressed to see the jump in oil prices from American gasoline  
consumption over the last 12 months.''

The bulls may be right. This surge looks very different from the oil  
shocks of the 1970s, which were driven by a politically motivated  
reduction in supply. Now the market is driven by a supply-demand  
imbalance. And we have little certainty about oil availability. We  
may already have passed peak production -- unless there's a lot of it  
down there that we don't know about.

If nothing else, the $100 Oil Club is fighting complacency. It is  
pushing traders into thinking about whether the oil wells are running  
dry, and what the long-term consequences of that might be. Oil may  
never reach $100, yet the club is reviving the debate on a global  
economy with finite resources.