Goldman Sachs economist Jim O’Neill has a chart that shows the market forecast for oil going forward 5yrs. So how accurate might that be?

Essentially he is making the call that it pretty much ends up, and stays around this level. The chart that he shows, demonstrates no fluctuations; how realistic is that, even if the price ends up circa $90.oo in 5yrs?

So first up, what is the condition of supply?

Production, and therefore supply, is flat. Even the highs of $140/barrel did little to increase supply. Why is that? The obvious answer is that supply is constrained, either voluntarily, or through an inability to produce more, viz. reserves and pumping capacity are limited. I don’t buy into the fact that at $140/barrel, producers decided not to take the money, although it is possible.

The Saudi’s you would think, if anyone, might make this decision to strategically preserve oil reserves for another day so to speak, after all, apart from oil, they basically have nothing of any value.

The Saudi’s no longer seem able to produce the marginal barrel. That distinction seems to be held by Russia, now the producer of the world’s marginal barrel. The Russians I dare say are not averse to high oil prices, and the higher they go, the happier, for the moment anyway, they will fulfill that demand.

Russia’s production has only really replaced the falling Saudi production. The chart of over-all supply, seems pretty static, regardless of the price fluctuations.

Cheap energy is critical to the current utilization of fixed capital, which underlies all production. The price of oil, therefore is critical to profit margins going forward. It doesn’t seem plausible that with increasing demand, static supply, that we end up with static oil prices, unless natural gas can replace oil in critical areas of energy production, powering utilities that produce electricity etc.

The US is now sitting on, if it is to be believed, enormous natural gas reserves, the price of natural gas are pretty close to, if not actually at, all-time lows. There are a few savvy investors calling for higher prices, which is not unreasonable, being that the sustainability of capital to absorb oil prices, will essentially kill any potential economic growth, unless there is a rampant inflation within goods and services supplied.