Dissenting Opinion: Crude Price Could Go Lower

Oil traders on the floor of the New York Mercantile Exchange (image: nyt.com)

In the last three weeks, a consensus among oil industry experts has emerged: the price of crude has found its “floor” at $40 a barrel. Data has shown that OPEC’s aggressive output cuts and unprecedented level of compliance with those cuts have succeeded in tightening the oil market and lifting the price of crude. With few exceptions, the price of crude has climbed steadily since its December low point of $33, and is currently at $47.80.

However, one group of oil price-watchers doesn’t agree with this consensus. An article in today’s New York Times reports on the contrary opinion that, if the global recession continues to get worse, the price of crude could fall more than 50 percent from its current position. This opinion is largely based on historical precedent: “Edward L. Morse, the chief economist at the New York broker LCM Commodities, says that each energy shock in the last 60 years resulted in lower growth for oil demand in succeeding years. This time, he said, should be no different. ‘The case is overpowering,’ Mr. Morse said.”

(image: nyt.com)

Morse and others like him seem to believe that the current economic situation is most comparable to situation of the early 1980s, when the price of oil collapsed and stayed low for the better part of 20 years. This belief draws support from the fact that cutbacks in oil production and exports by OPEC and non-OPEC producers have built up sizable spare production capacity (that could reach 8 million barrels per day by the end of 2009, according to one estimate), that could be utilized to ratchet up production as demand grows incrementally, holding prices down. This hypothetical scenario runs contrary to the prevailing opinion, recently articulated by IEA, that current cutbacks in production could lead to a slow response to resurgent demand, which would in turn lead to a price spike.

For now, it appears that the widely-accepted floor of $40 a barrel underneath crude prices will hold indefinitely. However, new developments in the unpredictable world of recession economics or in the turbulent political realms of oil-producing nations could turn the oil market upside-down once again. As is always the case with predictions on the oil market, only time will tell who is right and who is wrong.