Saturday, December 31, 2011

$100 a barrel oil in 2012 Seems Unreasonable

  Everyone in the economic forecasting business is admitting that they had the 2011 worldwide GDP growth forecasts all wrong, and that goes from the Federal Reserve to established investment bank and private forecasters, and to all the talking heads on television, who crib their numbers from others anyway.

China is slowing significantly from its 8% rate of GDP growth, Europe as a whole may be slipping into an actual recession, and U.S. forecasts for 2012 are moving towards a 1-1.5% GDP mid-range estimate.  The auto industry commentators are noting fewer miles driven by domestic motorists.  Truck miles are not really growing, partly because of growing efficiency by the largest operators and retail owners like Wal-Mart, and by economic factors in 2011. 

I understand that Iran is threatening to block shipments through the Strait of Hormuz, but this seems like empty saber rattling, since the entire world knows that too much energy flows through the strait for this to be permitted.  In fact on December 28th, a communique from the U.S. Fifth Fleet said the following: "Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated."

Meanwhile, a few propaganda pictures allegedly of Iranian submarines on naval maneuvers appeared on Internet news sites.  Honestly, the pictures reminded me of my eighth grade history book which had charcoal and pencil drawings of the Monitor and the Merrimack at the Battle of Hampton Rhodes.  I don't believe that these vessels provide a credible threat that would justifyr the "20-$30 a barrel risk premium" some analysts suggest are in oil price projections. 
Again, what exactly is driving a forecast of $100 a barrel oil in 2012?  A reasonable hypothesis?  A world awash in liquidity and market speculation.  Another interesting issue is the collapse of natural gas prices in the U.S., driven by high inventories and a mild winter.

The above graph comes from Professor Mark Perry's blog, Carpe Diem.  It inputs the record low prices reported in today's press, such as the New York Times.

We've talked about natural gas in many previous posts as being a fuel that should gain market share, particularly in electricity generation, for several reasons, including price and lower greenhouse gas emissions associated with using the fuel.  Now the price differential borders on incomprehensible, even before the 2012 petroleum forecasts. What gives?

If there are intrepid forecasters out there who could explain $100 a barrel oil for me, I'd love to hear from you. 

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