Oil Prices May Be On the Way Down - Way Down

One little known theory of commodities pricing is that what goes up fast, comes down fast. Be prepared for a precipitous fall in oil, gold, silver, and platinum.

Some oil executives worry prices may fall
By Jad Mouawad The New York Times
SUNDAY, DECEMBER 4, 2005

NEW YORK Hold on to your gas guzzlers: Cheap oil may once again be just around the corner. Even as consumers worry about high gasoline prices and rising heating bills, oil executives in London, Texas and Saudi Arabia seem to be concerned about a prospect of falling oil prices.

In a recent speech in Singapore, John Browne, the chief executive of BP, spoke of a possible sharp drop in prices and called current levels "unsustainably high."

John Hofmeister, head of Shell Oil in the United States, said during an interview, "This high price cycle is artificially inflated."

The notion of a steep falloff in energy prices may seem far-fetched.

After all, in the past year, the market has experienced crude oil prices that touched $70 a barrel; huge disruptions in the Gulf of Mexico; strong demand from the United States and from the world's fastest-growing market, China; continuing problems in producing Iraqi oil for export; and mounting tensions with Iran, a large OPEC exporter.

If anything, most of those situations would point to a sustained period of high energy prices. Most analysts said they expected crude oil prices to remain above $40 a barrel for the foreseeable future.

But the oil business has witnessed a succession of booms and busts, and oil companies have found it impossible to balance their future production with the world's need for oil. Too much capacity, and prices fall; too little, and they rise.

Today, producers are again under pressure to step up production and refining, and to increase investments to get more oil to the markets quickly. But oil executives and government ministers are concerned that if demand slowed down, even a little bit, those investments might create a large oversupply in two to three years, pushing prices down again.

Only a few years ago, the industry was dealing with a glut in production capacity, sluggish demand and a financial crisis in Asia. All of that led to an oil-price collapse in 1998, with futures contracts falling to about $10 a barrel.

Prices eventually rose, but the experience left a lasting impression among producers. As Saudi Arabia's oil minister, Ali al-Naimi, said recently at a news conference in Riyadh, "As producers, we don't want to build capacity without demand."

This recurring debate in the industry may seem odd. Recently, the theme has been the end of cheap oil, prompted by a surge in Chinese demand and a lack of spare production capacity. Traders' concerns that producers would struggle to catch up with consumer demand pushed prices to $60 a barrel from $30 in less than two years. Doomsayers saw signs that the world was running out of oil.

But there are indications that high oil prices may be coming to an end. After briefly topping $70 a barrel when Hurricane Katrina interrupted supplies from the Gulf of Mexico, prices have fallen on the New York Mercantile Exchange. Analysts at Citibank said oil might fall to $50 a barrel, and possibly less, in coming months.

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