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Goldman predicts $200 oil

By Frank Kane




You could almost feel the self-satisfaction in a lengthy research document, “$100 oil reality: Super-spike phase 2 ushers in a period of chronically high and rising prices”, published by American heavyweight bank Goldman Sachs earlier this month.


Behind Goldman’s dry broker-speak was a quiet sense of triumphalism.


In early 2005, when oil was trading at around the $50 per barrel level, the bank had almost been laughed out of town when it suggested the world was on the verge of a long period of rising prices, and that $100 per barrel was a possibility in the event of “geopolitical turmoil”; economic recession was the only thing that could hold it back, Goldman said then.


In fact, oil broke through the psychologically significant $100 level late last year, without an unusual level of political turmoil – just the normal level of daily crisis prevalent since the invasion of Iraq in 2003 – and with fears of a world recession increasing by the day.


Now, with recession confirmed, crisis in world financial markets and some leading experts predicting a fall in the price of world commodities, oil is still at the $100 mark, though off the highs of $111 reached earlier this year.


Goldman Sachs has once again proved the accuracy of its forecasts and analysis, and, seemingly emboldened by this success, has stuck its well-paid neck out once again.


Now it sees a “super-spike high end” of as much as $200 per barrel by 2010.


That figure caused sharp intakes of breath in energy ministries and business circles across the world. The Goldman gurus had got it right three years ago; how likely was it that they were right this time? And how could the world live with oil at the apparently stratospheric level of $200 per barrel?


The Goldman arguments are persuasive.


We are into year four of the “super-spike” era, the broker maintains, and about to enter a classic economic encounter between the forces of supply and those of demand, symbolised by the competing desires of two acronyms – Opec versus OECD.


In a nutshell, the world is largely dependent on the oil produced by the Organisation of Petroleum Exporting countries – Saudi Arabia, Kuwait, the UAE, Iraq, Iran and Venezuela are the biggest – but there is little evidence of a long-term desire in those countries to increase supply to the industrial giants of the countries of the Organisation for Economic Co-operation and Development – principally the US, Europe and Japan.


There are other sources of crude oil in the world – notably Russia with its huge reserves, put by some experts at the second largest in the world – but for a variety of reasons, political, industrial and economic, these may not be able to significantly raise production levels. “Non-Opec may be in the process of a long-term flattening trend,” says Goldman, meaning that production growth will be slow in these countries and will not match growing world demand.


Into this complicated scenario is thrown the now-real possibility of serious recession in the US and the knock-on effects in Europe and Japan. In the booming economies of China, India and the Middle East, oil prices are regulated at below market levels. With governments effectively subsidising oil in these countries, they can afford to outbid the OECD countries for the vital commodity.


Broadly speaking, what we call “the West” uses its oil for transportation – cars and aeroplanes; the East, with lower levels of personal transportation, uses it for industry. In order for some equilibrium to be re-established in world oil markets, the West will have to wean itself off its gas-guzzling life-style. There is no sign of this happening in a “secular” time frame, says Goldman Sachs.


(The word “secular” has a specialist meaning in economics, different to the usual meaning of “non-religious”. It means “long term” – anything based on a 10 years to 50 year timescale and above.)


“The core of our ‘super-spike’ view is that oil prices will keep rising until demand declines globally on a multi-year basis, resulting in the return of excess capacity and a lower cost structure,” says Goldman.


But that will not happen any time before 2011, according to Goldman. It is likely to be 2012 before “normalised” conditions begin to be re-asserted in the world oil market, but until then price rises


 will be the trend, and the $200 “super-spike” will occur if global growth shows signs of reaccelerating and if the US recession proves to be short lived.


But as ever in economics, there are dissenting voices from this view. Merrill Lynch, one of Goldman’s big global rivals, which was perhaps stung by the accuracy of the previous “super-spike” prediction, has taken a more restrained view on the oil price.


Merrill’s research puts more emphasis on the effects of US recession on world demand for all, and earlier this year it predicted a $10 per barrel reduction in the price once the full extent of the US economic troubles were apparent. Last week, this forecast seemed to be working out, with major oil markets showing quite significant falls after the week’s financial turbulence and the prospects of further falls in stock markets. But crude prices were still around the $100 level.


There is also an increasingly loud debate about the role being played by speculation in the great oil price rise. The International Monetary Fund warned recently that “non-commercial traders” – that is speculators to you and me – were moving out of bombed-out financial stocks and into commodities, such as oil, gold and metals, stoking a boom in all these basic essentials.


Some experts estimate the activity played by speculators in the commodities markets amounts to as much as 50 per cent of all trades. And certainly the oil futures market is showing no sign of a fall in the crude price until 2016.


Perhaps the whole commodities boom, including the oil “super-spike” will turn out to be no more than the manipulations of the speculators, who will get their fingers burned when the great commodities sell-off takes place. Goldman, for one, would argue strongly against that theory.


The firm has now coined the “super-spike” theory, and is sticking to it for the “secular” future.



Who wins – and who loses – from oil




The oil exporting countries, mainly in the Middle East, and their sovereign wealth funds. The Opec countries, of which the UAE is a leading member, sit on the majority of the world’s energy reserves. Last year alone the Gulf generated $150 billion (Dh550.5bn) surplus from energy sales. The SWF’s of the region are among the most active investors in the world, with the Abu Dhabi Investment Authority holding an estimated $900bn in funds.


Russia – and its energy oligarchy.


The Russian economic miracle of the past decade has largely been driven by rising prices of oil, gas and other commodities. The country has the world’s second largest reserve and cash flow from revenues props up business across all sectors, and is tightly controlled in the hands of a few entrepreneurs.


Oil Companies – some more than others. The oil corporates usually do well during periods of rising prices, during which the increase can usually be passed on to end-users. But some have better access to supply than others. Shell, for example, was concerned about the quality and quantity of its reserves, and the cost of accessing new ones. But rising prices make previously uneconomic reserves more viable.




The United States. The world’s biggest economy is also the biggest energy consumer on the planet. Energy price rise slows the rate of growth in the US at a time when its financial system is coming under strain. But the political unpredictability of the US reaction means trouble for us as the Americans try to secure supplies. And recession in the US has serious consequences for the rest of the world.


Asian economies. China and India will find it difficult to sustain their growth rates if oil prices rose significantly.




The environment. With oil set to reach $200 per barrel, in theory we should all take more care on how we use the precious stuff.