Higher Oil Prices in 2012: Goldman Sachs

I heard from a friend in New York that the most reasonable scenario he heard for higher oil prices in 2012 came from Goldman Sachs.  Unfortunately, she didn't have the report at hand, and I can't get a copy either.  The argument, she said, was that OPEC, and particularly Saudi Arabia, had lost its idle production capacity. This has long been a rumor about Saudi Arabia, normally the swing producer in OPEC.  Industry sources like API and government sources like EIA don't seem to document this phenomenon, but it continues in the financial market place. 

Goldman apparently had a chart that showed worldwide production versus worldwide capacity, and those two lines came close to converging in 2012, which buttressed a Goldman forecast for higher prices in 2012.

First, this kind of supply constraint, if you can call it that, would come into operation if there were either a supply disruption (like Iran blockading Hormuz) or a price spike for other reasons, such as speculation, and OPEC wanted to restrain the spike but couldn't.  I'm not an oil trader and don't pretend to be one. Goldman Sachs are premier traders.  Instead, I like to focus on fundamentals as an analyst and investor.

"Economic growth drives energy demand," as Exxon Mobil writes in its latest global energy review.  Other things equal, if we are hitting a global slowdown, driven by recession in Europe, and slowdowns in the U.S. and China, compared to both last year and to earlier forecasts, then energy demand should not be driving oil prices higher.

Another thing to note is that there have been long-term, sustained gains in energy efficiency in OECD countries, according to the Exxon review.  Their projections show the OECD economies being 50% larger in GDP terms in 2030 compared to 2005, while their energy demand in 2030 is flat to down!  Average energy efficiency gains are 1.5% per year in their forecasts.  This takes pressure off the need to increase domestic production and imports, or to access new sources of supply.  In 2030 oil and natural gas are still the dominant energy fuels, according to Exxon, so there is no real supply issue and no "peak oil" before 2030, if Exxon knows their business. 

So, it seems as if forecasts of $140 a barrel oil in 2012 must be driven by supply interruptions of some kind, and closing the Hormuz choke point is the one that is on the mind of the market now. I don't have any inside information about supply interruptions, but a blockade of Hormuz seems a remote likelihood.  If it really happens, the world may have other, more serious worries.  Remember, though, if a Hormuz blockade were to be sustained, then GDP forecasts will have to be revised downward again, which won't be good for the financial markets or the economy. 

Let's keep our fingers crossed that Iran can be allowed its braggadocio, the West can have its sanctions, and cooler heads will prevail.