From the February 01, 2007 issue of Futures Magazine • Subscribe!

Fueling the fires

There’s been some debate in the corridors of Futures magazine as to where the price of crude oil will be headed in 2007.

Some people have said it should continue down, as there seems to be ample supply, especially in the United States. And with the so-far mild winter in the Midwest and Northeast, it seems some of the products are less in demand, mainly heating oil and natural gas. When you look at the price of crude in mid January, the February contract closing just below $55 per barrel, those forecasts ring true. But I’m one of those who believe there’s still too much conflict in the Middle East and elsewhere for us to see oil prices dipping much lower.

Apparently, I’m in good company. As Linda Rafield, senior energy analyst with the energy news service Platts, writes in “Crude oil: It is all in the numbers,” we could have some wild and very bullish times in 2007.

Much has happened behind the scenes regarding supplies, but with crude prices dropping into the $50s, it seems the world has forgotten that there are fundamental crunch factors. Key to these is the decision by OPEC to reduce its output by at least 1 million barrels per day. Other factors include Russia’s shutting down of a main pipeline to Europe to punish problematic Belarus, an escalating war in the Middle East, revolution in Nigeria, and saber rattling in Venezuela, which all make the issue of supply a primary concern. And domestic supplies? Hardly enough to carry the load.

The Middle East war adds a major layer of uncertainty to the pipeline. The New York Times reported in January that “for years many conservationists argued that the government was subsidizing gasoline by spending billions of tax dollars to keep ships in the Persian Gulf and troops on the ground to assure the flow of oil. But some oil experts say the picture may be more complicated now that war is raging in the Middle East: these days, they say, the military commitment doesn’t just hide the real price of oil, but also has become a factor in pushing the price up.”

My first response to this was, “duh.” I mean, whoever bought the argument that the Iraq war would pay for itself through Iraqi oil output was naive at best and, well, complicit at worst. Further, the NYT article quoted a fellow from the National Defense Council Foundation, a non-profit group based in Washington D.C. that lobbies for less reliance on foreign oil, as saying that due to the damage to Iraq’s oil industry in the course of the war and the threat of a further spread of violence in the region, that a $20 premium is tied to each barrel of oil sold. And though energy lobbyists pooh-pooh the argument, one Cambridge Energy Research Associate analyst noted the war has cut Iraq’s output in half, curbing supply and tightening the market. Hmmmm.

The U.S. and global economies seem to have absorbed higher energy prices without too much ado, which is good. However, if in 2007 the average price of oil is anywhere between $69 to $76 per barrel, as some analysts predict in the Rafield article, to average out means prices will be well beyond last year’s high.

We can bask in the warmth of an incredible mild winter while it’s here and believe lower gas prices will be the norm going forward. But according to the analysts who live and breathe this stuff, not anecdotal comments or home spun knowledge, we’re going to have to put on our seat belts, and not just because it’s the law.

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