Goldman Sachs predicts $150-$200 a barrel oil in six months

As the price of oil began steadily climbing two years ago The Fueling Station has consistently predicted that it was unlikely to go back down, contrary to what some analysts were confidently predicting. So, it comes as no surprise that a new report by Goldman Sachs says the price of crude oil could soar to $200 a barrel in as little as six months, as supply continues to struggle to meet demand.

This comes as US light crude passed the $126 mark for the first time.

Oil prices have now risen by 25% in the last four months and 400% since 2001.

I am not an oil expert. But the current problem is not about oil itself, which is why so many of the "experts" have gotten it wrong. It's about the geo-politics of oil. If you pay attention to political events around the globe it's not hard to see why the price of oil is rising. The signals are not hard to find. The volatile situation in the Middle East, as well as corruption and rebel activity in Nigeria, coupled with fast-rising demand from the emerging economies of India and China, falling production in Mexico and Venezuela, and tight refining capacity in the United States, was bound to disrupt the oil industry. Add commodity speculators into that mix, and you have the answer to rising oil prices.

- David Adams

We have featured all of this aspects of the oil industry on our blog, which has helped me put together the big picture in my mind of where we are right now. I have no idea if oil will reach $200 in the next six months. But Goldman Sachs was one of the institutions that got it right two years ago, so I wouldn't be at all surprised if they are proved right again.

The next question is whether rise oil prices is altogether a bad thing. Just as Barack Obama argued successfully last week, lifting the gas tax doesn't really help anyone in the long run. Higher gas prices will in fact probably help teach us to conserve our fuel better, increase consumer demand for fuel efficient cars, and speed up the next generation of alternative fuel vehicles.

While it may be an uncomfortable transition for Americans who depend on their car for work and getting kids to and from school, they should take a moment and ask how it is that Europeans manage to cope even though they pay the equivalent of $10 a gallon for gas. We really shouldn't be complaining about $4 a gallon.

If politicians were thinking sensibly about this they might consider taking some kind of measure to help truck drivers who are being hit especially hard right now. Maybe the government could offer them some kind of extra tax break on their gasoline and diesel bills.

Click here to read more about Arjun Murti's Goldman Sachs report.

Comments

[melissa]

Well if MCcain gets in you can guarantee the oil/ gas prices will continue to rise. The war will never end and we will continue to go further into a recession. Let's get a Democrat in and at least have a chance on maybe something changing... Same ol' hat is just that!

[Steve]

Wow, melissa you are dumb. Get back on the couch and wait until oprah is on before you speak again.

[melissa]

Steve,

First off I don't watch Oprah and I am not on the couch. Maybe you might want to do some research.Get off your Redneck butt stop watching Nascar... and maybe turn CNN on... wait do you even know what CNN is??

[Scott]

Oil and gas has not gotten more expensive, houses don't cost twice as much, food isn't more expensive,.... THE DOLLAR IS JUST WORTH HALF AS MUCH!

[Scott]

Oil and gas has not gotten more expensive, houses don't cost twice as much, food isn't more expensive,.... THE DOLLAR IS JUST WORTH HALF AS MUCH!

so-called "republican managerial expertise" is going to bankrupt all of us, except of course for the corporate elites which it loves so dearly.

[terry]

Lets see...stock market bubble...bust...rich get richer...housing bubble...bust...rich get richer...oil price bubble...no bust yet...but rich getting richer...I think I see a pattern here! :0((

[Bob]

It's not *just* oil that's leading this country to economic ruin. It's the twin deficits - the trade deficit and the budget deficit. It's the fact that we have a negative savings rate. It's the fact that some countries are considering trading for oil based on the euro, not the dollar. It's the fact that we are no longer a manufacturing nation. The financial services sector has grown tremendously, but we're not *creating* wealth anymore, we're just shuffling it around.

In a couple decades or so, China will be the world's number one economy, Europe second, and the U.S. third. We are fast becoming Rome...

[k]

Terry gets it. Post-oil bubble likely grain, alt-energy and mass transit. See GE, Bombardier, CSX. Notice all the rail positioning lately?

[kitty]

Europeans aren't paying much higher prices than they have been paying for years. With the exception of Iran & Venezuela (?), all oil nations trade in dollars. The dollar has sunk to less than half of its value in 5 years vs. the Euro. So, $10 a gallon, is €6.45 at today's exchange rate. When I left Europe in '04, gasoline was $5.70 a gallon. Europe has seen an average 75 cent per gallon increase in 4 years.

[Ray]

I do think as we get closer to the election that Cheney will lower the oli prices somewhat to keep at least a veto proof congress for the Republicans.

Whether Cheney is helping McCain or not remains to be seen.

400% increase since the Cheney/Bush administration started - they made more money than any administration in history.

[Jose]

If Marxist barack gets in, expect crippling tax hikes, socialized medicine, higher oil prices because the liberal cause panders to enviromentalists and global warming nuts who are worried that drilling in the U.S. may harm carribou. People get with it. Global warming far from a proven science.

[cltsig]

I hope oil does go to $200/barrel so I can see whether or not the big gas guzzling SUVs on US19 still drag race to the next red light. "Congratulations, you got there first."

[WALTER]

A few months ago one of the automobile mags reported that General Motors had fuel cell versions of the Chevrolet Equinox working, that they would soon offer them to 1000 people to be chosen by lottery in certain areas of the US and that they planned to spend $200 million to build supporting infrastructure. A couple of weeks ago I saw an interview with the Chairmen of Shell Oil and Autonation. During said interview the Shell Oil guy said that fuel cell vehicles were 20 to 25 years away. The Autonation guy said he thought it would be 15 to 20 years. Shortly thereafter GM announced shelving the fuel cell program to concentrate on electric power plants which would power at least one 2010 model.
Is there a connection here????
And, does anyone besides me remember the mega oil company mergers? After the mergers they closed several refinerys because of excess capacity. Now they say we are using so much gasoline they can't keep up with supply without importing gasoline!

[Bad]

This is getting ridiculous. Bush made his money from oil before bring president, he is making it while he is the president and he is going to make when he is out.
That is why he is protecting these people now, For his future not ours.

[kitty]

Jose, it must suck to be as ill-informed and afraid as you are.

[Jorge Pinon]

About a couple of weeks ago...$115 or there about...I searched Reuters-Energy and Bloomberg-Energy news from twelve months ago when the price of oil was about $65.00 per barrel and found that the issues in the market place then were the same as of today...Iran's nuclear reactor, Venezuela's belligerence, Nigeria's social conflicts, China's demand, etc. World oil balance still at the same equilibrium level of app. 86 mmbd of a year ago. The only factor is the dollar $1.29 to $1.58 today...my calculation about $14/16.00 worth. I accept a geo-political premium of $20 per barrel...so I accept $100 per barrel; but today's $125.00, or for that matter $200.00 because of the anticipation of an event that has not materialized?? come on, you must be kidding. Particularly with an economic recession which is going to impact future demand, and with Saudi Arabia sitting on 1.0-1.5 mmbd of spare producing capacity which could impact supply as soon as they announce that they are opening the valves...I believe that we are about to see a bubble burst. The only caveat is gasoline inventories going into the summer months and hurricane season. By the way it would not surprise me to see the Saudis increasing production sometime in the fall if prices continue this way ... they owe Bush a few IOU's...Iran, Venezuela and other members of OPEC are not going to be happy about this but who knows...JP

[Simon]

Let's remember who is really at fault here. It is those people driving Hummers, Expeditions, Escalades and other 9 mpg vehicles. Sure, this is FL and some people need to tow boats and need an SUV to do so, or they have a lawn care or moving business and they need the towing capacity, but it is a fact that 90% of SUVs never leave the road. They are status symbols so one soccer mom can show another soccer mom how many homes she sold last quarter. I know, I know. You wouldn't have bought it if your couldn't afford it. The fact is those drivers burn three times the amount of gas they need, thereby increasing demand, thereby increasing price.

[cltsig]

Simon - You're right, they are status symbols except now they're symbols that the driver is a (insert your derogatory term here, analogous to: short-sighted, greedy, unintelligent, same-people-who-have-HELOCs-out-the-wazoo,
debt-laden, non-readers, etc).

[Biff]

I'm rich, so I don't care about this.

[Tino]

You can boo-hoo-hoo and point fingers on a blog all day, or you can put your money where your mouth is. Unlike housing prices, oil prices can be easily hedged by owning a few shares of oil company stocks. Then, when you are filling up, you are literally paying yourself.

It's not rocket surgery.

[Leo]

First Obama was a Muslim, now he is a Marxist. You cannot be both (its like calling someone a Christian-Athiest); shows how stuipdly ignorant some people are.
Back to oil, I heard something interesting the other day. A man I worked with quit his job (cost too much to drive so far), and got a lesser paying job closer to home. I talked with him a few days ago, and he said that he has never been happier. He spends more time with his kids, tehy eat dinner together, and he is less stressed now that he drives A LOT LESS. Imagine that.

[Marc]

Large SUVs are using 3 times more gasoline than an equivalent car. Here are some facts about the ultimate POS gas-guzzler:

The H2 is a gas guzzler. Because it has a gross vehicle weight rating over 8500 lbs, the US government does not require it to meet federal fuel efficiency regulations. Hummer isn't even required to publish its fuel economy (owners indicate that they get around 10 mpg for normal use). So while our brothers and sisters are off in the Middle East risking their lives to secure America's fossil fuel future, H2 drivers are pissing away our "spoils of victory" during each trip to the grocery store.

The H2 is a polluter. Based on G.M.'s optimistic claim that it gets13 mpg, an H2 will produce 3.4 metric tons of carbon emissions in a typical year, nearly double that of G.M.'s Chevrolet Malibu sedan.

The H2 is a death machine. You'd better hope that you don't collide with an H2 in your economy car. You can kiss your ass goodbye thanks to the H2's massive weight and raised bumpers. Too bad you couldn't afford an urban assault vehicle of your own. Or could you...?

and the most disgusting part of these monster SUVs is that the Bush administration still gives you a HUGE tax incentive to buy one:

The H2 is a tax loophole. Under the current tax laws, business owners can deduct nearly half the cost of their H2s. If you are in the highest tax bracket, that's a tax savings of nearly $10,000! The government rewards you more savings for buying an H2 than you'd get for buying an electric car.

My car is a Pontiac Vibe, I am averaging 28.2 MPG in Pinellas County city driving and I have as much interior and storage room as a mid-sized SUV...get real folks, sell those POS SUVs and save a fellow soldiers life! No more Blood for Oil!

[TJ]

Sure, let the democrats in so we can watch our taxes go up too! Then we will have high gas prices and high taxes! It's more than just the war in Iraq. I blame the greedy oil companies huge profits at the expense of us poor schmoes! They can afford to take a cut but they won't. Almighty dollar!

[rich]

the oil prices are just a political tool in an election year.. the countries top two are big oil from way back... you wait and see come close to election time.. the price will fall.. and the republicans will take full credit for it.. and it will buy them votes.. since they solved the oil crisis they created... wake up people.. this administration is lie after lie.. and the propaganda to go with it..

[cltsig]

Marc - That tax deduction for large SUVs for business owners was in place long before Bush was. It was there during the Billary era or did your fact machine not tell you that?

[Daniel]

Jorge, finally someone who is making sense. Oil is being used as a financial instrument to hedge against the weak dollar, it is not only going up because the dollar buys less but because investors have been fleeing the weak dollar seeking a safe haven and finding oil. It only cost $4 to buy a barrel of oil on margin for heaven sakes. Where would you invest if you were a hedge fund? 50% margin for stocks or less than 4% for oil? Go to the head of the class if you said oil. The Dems want to impliment a windfall profits tax, BAD IDEA Mr Obama!!!. The last time there was a windfall profits tax on oil, domestic production dropped and we had shortages. Raise the margin requirements or just allow companies that will actually use the oil, like airlines and trucking companies to buy futures. That will end the oil futures speculation and oil would drop to $60 a barrel.

[Marc]

cltsig...part right, but in a large part wrong.

The tax deduction was available during the Clinton administration. It was meant for Farmers and small business owners that used large fleet vehicles such as large pickups (3/4 and 1 ton), cargo vehicles, tow trucks etc. After the year 2000-2001 the SUV and large Truck craze kicked into high gear so 6,000+Lbs vehicles that were previously not available to the general public began to appear including the:

Cadillac Escalade ESV
Chevrolet Avalanche 2500
Sierra Denali
GMC Yukon XL
Chevrolet Tahoe
Hummer H1 & H2
Chevrolet Trailblazer
Dodge Durango
Land Rover
Range Rover
Lincoln Navigator
Lincoln Blackwood
Mercedes ML55 AMG
Porsche Cayenne,
Toyota Sequoia 4WD
Toyota Tundra 4WD Access Cab
Ford Excursion
Volkswagen Touareg
Ford Expedition
...there are others, but the above were vehicles that didn't exist until the 'keep up with the Joneses' crowd starting to buy them to carry around the wife and a baby seat.

In 2001 after 9/11 the Bush administration expanded the rebate from $25,000 to $100,000. This was done solely to help the sales of h2 Hummers (yes records show that GM and Ford lobbyists specifically asked for this to help their large SUV strategic sales plan).

So guess what currently there is a bill by the Democrats asking to recind the expansion from 25k to 100k and bring it back to 25k where it should be (if not abolished completely).

IMHO there should be a rebate for electric and hybrid cars...not for those monster SUVs. Especially since Farmers now are cleaning up with the rising corn, wheat and rice prices.

[Daniel]

Tino, that is some ROTTEN advice to buy oil company stocks. Energy was down today because many investors believe oil may be peaking. Remember the stock market is a predictor of FUTURE events. Your advice is like telling someone to buy housing stocks in 2004 or internet stocks in 1999. NOT a good idea for those who did. Besides, western oil companies only own LESS than 10% of the know oil reserves, they have complicated agreements with foreign governments to drill in those countries. The higher oil goes, the less they get to keep. As prices go up, oil companies have to pay more for the product themselves. That is a big reason their profit margin is only 8% and dropping. Exxon, despite what seemed like high profit numbers, dissapointed the street and their stock price dropped when their profit was announced last week. Maybe you should stick to your day job instead of giving bad stock tips.

[paminator]

Any environmentalist who advocates increased energy taxes (either direct taxes or carbon trade/cap schemes) to avert 'climate catastrophe' should be cheering loudly that gas prices are so high. This is the alleged mechanism that will curtail gasoline and energy consumption- raise the price consumers have to pay. It also impacts electricity prices. As utilities see reductions in electricity demand (due to a slowed economy because of high gas prices), electricity rates will have to increase to maintain shareholder expectations. Higher electricity rates may result in further reductions in electricity demand, exacerbating the effect.

If these high energy prices are the fault of George Bush and the administration, then I expect to see the UN, the EU, Greenpeace and newspaper editorials thanking them profusely for making a potentially profound impact on CO2 emissions. Who knows...George Bush and Teddy Roosevelt may turn out to be our most environmentally responsible presidents!

[Tino]

Daniel,

I guess you are right. I have been getting beaten up by people for recommending oil & gas stocks for the past decade: "Oil for $100? Gas for $10? Are you insane?"

Unlike houses and internet stocks, demand for oil & gas will continue to outstrip supply. When that is no longer true, then I'll be selling. However, I do not see that occurring for a long, long time.

Forget XOM. Look at pure play E&P companies that are growing their drilling portfolios.

paminator, tell your kids that they can't play their video games, work on the computer or watch the big screen TV. Electricity demand growth is being driven by consumer electronics and will not be falling any time soon, either.

Complaining about high energy prices and those big, bad companies may make you feel good, but it won't make you any money. Buy energy and sleep better at night.

[Tino]

The comparison of an internet-boom stock (with billions in market cap based on no earnings and no revenues) and an oil & gas company (sitting on billions of dollars of natural resources underground) shows the laughable ignorance of many on this discussion board.

I was also surprised to find out that higher oil prices mean lower profits for oil & gas companies. I'm going to have to ponder that one for a while.

[Tom]

I think its likely that we will hit $150/bl oil. Geopolitical climate is certainly cooperating. Rebel attacks on oil installations in Nigeria, Israel's assertion that Iran is less then a year away from having the bomb, and now evidence that Chavez is directly supporting Colombian rebels.

From the economic standpoint. we've gone from a week dollar, to being caught in an inflationary cycle. It goes beyond current events and is a result of ever increasing debt (as individuals and a nation) by a country that produces hamburgers and health care.

Be thankful its not worse then it is. Gasoline is the cheapest it has been relative to oil price in 20 years. Gasoline crack margins are expected to be under $2.00/brl (that's $.05/gallon) in the 4th qtr. Hardly worth the effort except that diesel margins are great (but you only get 10 gallons from a barrel vs. 19 for gasoline) and demand is so strong we are now actually exporting diesel fuel. That's because our economy is dropping relative to the rest of the world. If it were not for ethanol, which is a little less then 10 pcnt of the fuel supply, gasoline prices would be much higher. Ethanol is about $0.90/gallon cheaper (net of blenders credit) to the gasoline wholesalers then regular unleaded. So ethanol has helped gasoline supplies and US economy (domestically produced good, foreign produced bad) but government policy is hardly surgical. The tariff should be on a sliding scale as well as the blenders credit. I think they should give the blenders credit directly to the consumer. Make it a credit on my debit card when I buy fuel.
Finally, one cannot discount the huge influence hedge and index funds have on commodity exchanges. They are overwhelming the "commercial" interests that use the exchanges to hedge physical transactions and thereby, the price exceeds the fundamental value. Usually the momentum they create makes the position right. Eventually the market sorts it all out.
Best to keep politicians influence at a minimum and more important, try to keep those influencing the politicians at a minimum.

[Daniel]

Tino, as long as you are going to invest in oil companies, it is probably a good idea to find out who really owns the oil. It is laughable and ignorant of you to think western oil companies are "sitting on billions of dollars of natural resources underground".
Western oil companies only control less than ten percent of the worlds oil reserves. Exxon was recently sanctioned by the SEC for OVERSTATING their reserves for the sake of their investors and stock price, now they want the SEC to change the way reserves are counted. The majority of the oil that oil companies pump is on foreign soil. In order to pump that oil they usually make what is called "production sharing agreements" These are complicated agreements that usually state that the higher the price of oil goes, the LESS the western oil compnaies get to keep. They are basiclly buying the oil themselves. So when the price goes too high, their margin starts to shrink. This from a recent Businessweek article "Host countries are renegotiating existing contracts to achieve better terms than the industry offered as recently as a decade ago, when oil prices were low; some are nationalizing assets.(can you say Venezuala?) New contract terms are tougher, too. For example, "[r]ecent auctions of exploration blocks in Algeria, Libya and Egypt have yielded terms that many executives believe won't generate returns to compensate for ever-higher risks." Yes, margins are shrinking as prices go up.
Oil companies profit margins are around 8%, compared to "internet boom companies" who I like to call software companies, who have profit margins over 25%.
As Tom pointed out, gas prices have not kept up to oil prices and refiners profit margins are around 4%.
http://www.msnbc.msn.com/id/24411755/

[Tino]

I was unaware that XTO Energy, Suncor, Chesapeake, Pioneer, Southwestern, and dozens of others did not own the hydrocarbons that they are sucking up and selling at margins of 50% or more.

I don't stay awake at night worrying that those nasty governments of Texas, Oklahoma, Alberta and Louisiana are going to expropriate their assets before they can grow at double digit rates for the next decade. Thanks for worrying about that for me.

Every reason you gave (government taxation, international drilling difficulties) raises the price of oil & gas, yet you think that this is a negative for all oil & gas companies. I am learning more and more from this blog every day!

[Daniel]

Tino, Your inclusion of Alberta with US States, illustrates your ignorance. Alberta is in Cananda. There is not enough oil in the states you mention to power the state of California much less the entire country, what don't you understand about "WESTERN OIL COMPANIES ONLY CONTROL LESS THAN TEN PERCENT OF THE WORLDS OIL" So if 90% is not under their contol, don't you think THEY have to buy it or have some type of arrangement with where ever it is they do get it? Those arrangements state that the higher the price goes, the less they get to keep for themselves.
So you don't think that taxation or a "windfall profit tax" will harm oil co. stockholders and the companies themselves? The last time there was a "windfall profit tax", domestic production dropped. The tax is based on how high the price goes. Obamas WPT is a tax on everthing over $80 a barrel. So you don't think that will cut into profits?
I didn't mention international drilling difficulties but rather foreign Governments changing exsisting contracts which change the dynamics of profit margin. Who cares if the price is increasing if these companies are getting a smaller cut of the pie. Look at that link I posted, towards the end of the article they give oil companies profit margin compared to banking, software and drugs.
BTW, Suncor's profit margin is 15%, not 50%. Pioneer drilling co is 13% not 50%, Southwestern energy is 18% not 50%. I hope you are not a broker giving out this eroneous info, you will end up getting sued.
By comparison, the seven top "internet boom companies" took in $92.3 billion in revenues and earned $23.6 billion in profits which is 25%. The companies you mentioned matched the eight big banks, subprime problems and all, with $41.3 billion profit on revenues of $267.3 billion, which is 15%.
Happy investing.

[Tino]

Pioneer (PXD) saw gross margins of 56.6% last quarter. I'm not sure where you found your financial information.

I re-read my post and didn't see where I said that Alberta was a state. I'm not sure how you decided that it was.

Yes, a windfall profits tax would raise the cost of production. Yes, it would probably reduce domestic production. If production falls, what would that do to prices?

All of your facts point to higher oil & gas prices, which is fantastic news for North American E&P companies. That is why they are up 5-10 fold in the past few years and will continue to grow at double digit rates.

[linda]

hey melissa you are the dumbmest person i've ever met i can't believe am youre friend

[Daniel]

I gave you the profits for Pioneer drilling company, PDC. If you want to mention companies names that have multiple listing in the same sector, you should give symbols to reduce confusion. BTW PXD had a net profit margin of 16.67% last year
http://moneycentral.msn.com/detail/stock_quote?Symbol=PXD

Also, when you make sarcastic statements like "I don't stay awake at night worrying that those nasty governments of Texas, Oklahoma, Alberta and Louisiana are going to expropriate their assets before they can grow at double digit rates for the next decade." You are implying that Alberta is not in a foreign country when in fact it is. You also grouped it with states, which it is not.
You seem to ignore the fact that US oil companies DEPEND on foreign governments who are nationalizing oil projects and leaving the US companies on the outside looking in. They used to need the US companies and their capital, now with oil so high they are doing it themselves or are making agreements where US companies get a smaller piece of the pie. Who care how high oil goes if they don't own the land OR the oil and are just like us and have to buy it at high prices.