Oil prices keep everyone guessing

A visit to Baku, the capital of Azerbaijan and also the oil capital of the Caspian region – which I enjoyed last week – makes you think hard about the central long-term issue facing the world's economies: the price of energy, and specifically the price of a barrel of crude.

Trying to forecast where the price will be in a year's time has become the full-time occupation of a small army of energy economists, oil industry gurus and pundits, not to mention a host of highly paid investment bank analysts in the world's great financial capitals.

But ultimately, you get the feeling that they may as well simply hang a sheet of paper on the wall, draw in all the numbers from 50 to 200, apply blindfolds and throw darts. The truth is that nobody knows for sure where oil will go, and we can only make the most tentative of guesses as to which direction – up or down. It is the most inexact of sciences.

Those who believe the price of a barrel will rise – let's call them the 'uppers' – are led by US investment bank Goldman Sachs, which had the foresight to predict the black stuff would hit $100 last year (which it duly did). They seemed to have their victory in their grasp in July, when crude topped $147 a barrel. The inexorable rise to $200 – which Goldman forecast would come by 2010 – seemed well within range.

The opposition to the Goldman camp – the 'downers' for the sake of convenience – has as its standard-bearer another American investment bank, Lehman Brothers. They believe that the oil price will sink back towards its marginal cost of production, around $50 a barrel, as recession grips the world's fast-growing economies in Asia, and the US weans itself off its addiction to oil for energy.

The downers seemed to have their moment of glory just a few weeks ago, when crude fell to $112 a barrel.

The two sides have some notable supporters and advocates. The International Monetary Fund weighed in to the argument last week with a report on the state of the world energy industry.

The paper stated that oil reserves in the Middle East, including the UAE, could last for another 100 years, but, significantly, took as its guide price a figure of $67 a barrel – close to the marginal production level. One point to the downers then.

But the uppers came back strong. Jim Rogers, and American oil guru who called the rise in the price of oil and other commodities accurately in 2006, told an investment conference that the current price levels were only temporary and said that it could hit $175 a barrel in the near future.

Also significant was the fact that Goldman Sachs, far from taking fright at the six per cent crude price fall last Friday, reiterated its stance that $149 was on the cards for later this year. So Goldman is sticking to its guns.

What made the downers' case more persuasive over the past couple of weeks has been the fact that the dangerous situation in the Caucuses, through which a big proportion of oil flows from the Caspian region destined for European use, did not affect the price. You might expect a threat to supply – which the Russian military action in Georgia undoubtedly represented – to lead to a sharp upturn in prices, but this did not happen. Oil is always subject to price pressures from geopolitical factors, so its failure to react to the Georgian conflagration was regarded as significant.

But what has been overlooked here is that the biggest geopolitical imperative for oil does not lie in the Caucuses, important though that region is.

The real determinant is in the great fields of the Arabian Gulf, which supplies most of America's oil. The Middle East has had a comparatively quiet summer period, with a subtle but pronounced decline in recent weeks in the perceived level of threat to supplies in the region. We have heard little for some time now of possible attacks on Iran, which carry the most serious threat to regional supply capacity.

The other factor to throw into the equation on the side of the downers is the US dollar, the currency in which international oil prices are quoted. A strong dollar – which we have seen now for a couple of months – implies a fall in commodity prices as investors no longer feel the need to hedge currency risk.

Those then are the elements currently at work in the great economic debate.

Time will tell whether the uppers or the downers will be proved right. In the meantime, the rest of us should perhaps get back to the blindfold and the darts.