Super Spike for Oil | Green Energy News

March 28, 2005 – Vol.10 No.1

SUPER SPIKE FOR OIL?

One hundred and five dollars per barrel - that’s what oil could reach, Goldman Sachs said in a report. That statement from the investment banking company (now with significant investments in wind energy) sent the price of oil soaring - once again.

Let’s look closely at the statement that rocked the world of oil trading. Goldman Sachs analyst Arjun Murti said...

"Oil markets may have entered the early stages of what we have referred to as a 'super spike' period, a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower prices return".

--- He said “ may” - There’s a measure of uncertainty in that word.

--- He used the words “early stages” and “period.” There’s no time frame attached: Early stages of a period that could last for what? Months, years, decades?

--- “Super spike” would be that $105 per barrel.

--- The words “high enough to meaningfully reduce energy consumption” are the ones that should be of interest.

What would it take - and how long would it take - for the U.S., the world’s largest consumer of oil to reduce energy consumption?

--- Driving less might mean voluntary car pooling. But for many, if not most, in a nation with generally poor transportation choices, there is no option but to drive. Short of moving closer to work (not an easy option) or perhaps telecommuting (which not everyone can do) most will have to endure high gas prices until they can afford to trade in the fuel-hungry vehicle for one less so. (see below)

--- Driving less might also mean cutting back on discretionary trips to the shopping mall - a notion that should make the nation’s retailers more than a little uneasy. In a car-based economy any let-up in driving will mean less consuming overall. A cut in retail sales because of fewer trips to the store could be the onset of a recession. (A hint here to retailers in a time of high gas prices. Encourage your customers to shop online. You’ll keep the some of the sales even if the number of bodies walking through your doors drops.)

--- Trading in the family SUV for something more efficient (like a hybrid) may take some time. Not everyone can afford to buy a new vehicle at a moments notice. Even though hybrid sales are doing very well (Toyota sold more than 10,000 Prius sedans in March alone) most of the vehicles on the road are NOT hybrids and NOT particularly fuel efficient.

It will take time - a decade, maybe more than that - for the U.S to switch to much more efficient vehicles, IF they are available. (The auto manufacturers still push fuel guzzlers despite high gas prices.)

So Goldman Sachs is clearly concerned with oil supply over the long run, as they should be. Currently supply is just keeping up with demand. There is no cushion as the company says. But the statement suggests that the time period where people adjust to higher fuel prices may be a long one.

Right now, given that people have few immediate options to consume less, consumption will remain high. As long as automakers drag their feet in bringing large numbers of fuel efficient cars to the marketplace (or as long as government refuses to force them to) gasoline prices could remain high or continue to rise.

Of course a deep recession with many people thrown out of work - no more need to drive - would bring oil prices down.