What will the price of oil be at the end of next year? Or next month?
It's hard to say and I generally try not to. That's why we're asking you, dear reader. But first, some background.
A comment on my last posting made a disparaging reference to a sentence in an article I wrote over the summer about oil prices. At the time, prices were just a bit off from record $147-a-barrel oil and I wrote that prices were unlikely to fall as low as they were for the previous generation.
There are good reasons why I try to avoid projecting oil prices. In the short to medium term, a geopolitical crisis, a bold OPEC production cut, a bigger than expected drop in U.S. consumption due to, say, a financial crisis (on top of price-induced conservation measures) and a decision by several big developing countries to lift gasoline price controls can all substantially change the price picture. Relatively modest changes in either supply or demand can produce big price changes; back in 1973-74, modest declines in supplies drove prices up sharply. On top of all that, huge flows of money in and out of commodities can magnify these moves.
One of the most important indicators of oil prices may be the amount of spare production capacity worldwide. That spare capacity had dropped to about 2 percent of world consumption earlier this year. Now increased production capacity from certain areas and falling demand has pushed that spare capacity to 5 million barrels a day or more, or close to 6 percent of world consumption. There's breathing room - at least for a while.
But for how long? That's another question.
That's why my vague formulation about future generations was about as specific as I cared to get in a series of articles prompted by the unprecedented spike in oil prices.
I covered the 1980s drop in consumption and prices for The Wall Street Journal, so I had a hunch that prices weren't going to stay at $125 or $145 a barrel. But they could have dropped to $90 a barrel (which would have been my best guess) or to $70 (which was the best guess of Phil Verleger, the Aspen-based oil economist, who I believe was the person who commented on my previous posting) and they still would have been higher than the prices the previous generation had seen. When I started covering energy again at the Post in April 2006, everyone thought it was a crisis when prices poked through the $70 a barrel level.
I can't pretend, however, that I expected prices to fall below $40 a barrel, as they did recently. How long lasting that might be depends on a lot of factors. How severe and how long will the economic downturn be? How much will Chinese oil demand slow (or even fall) as a result of the gasoline and diesel price increases of the past year? Will the summertime spike in oil prices leave people so scared that they will seek energy efficient cars even now that prices have tumbled? How much production will get shelved because prices are low?
Right now, oil is trading for $39.80 a barrel for February delivery - after OPEC production cuts are supposed to go into effect. But oil traders are putting an even higher price on it as the months go on, reflecting perhaps a belief that the global economy will start to rebound or that OPEC production cuts will start to bite.
So now it's time for you to say what you think. Go ahead. Tell us what you think the price of oil will be exactly three months from today.