Is Crude Oil About to Collapse?

The cover story in this week’s Barron’s is a canary yellow screamer: Ready for $150 Oil. (click cover at right for larger graphic)

Normally, the magazine cover indicator does not work with business press; it only applies to mass market magazines (think Time or Newsweek).

In the present case, Gene Epstein is forecasting a new leg up in oil prices — “projected oil shock of spring 2012” — breaching the prior highs in crude that will shave 1.5% off of GDP:

“Despite the recent 20% decline from April highs, new highs on crude, heating oil, diesel fuel, jet fuel and gasoline seem likely over the next 12 months. Following some further easing over the summer, the second leg of the long-term bull market in petroleum–the first occurred in 2007-08–probably will begin this fall.

As oil producers’ spare capacity gradually declines to worrisome levels, the average monthly price could reach a record $150 per barrel by next spring, with spikes to $165 or $170. With this, $4.50-a-gallon gasoline will become the norm. That will put a huge dent in consumer wallets, while ramping up the desirability of fuel-efficient cars.”

For many reasons, I have my doubts about an oil shock in the spring of 2012. I do not see the economy as remotely as strong as it was pre-crisis, so demand for Oil is not nearly as robust. Secondly, with the dollar down 40%+ since 2001, the big spurt in Oil prices may have already occurred. Third, a rise towards $150 is likely to slow the global economy down enough to correct prices back towards ordinary levels before we hit that mark. And last, I am less than impressed with the author’s forecasting record.

Regardless, it is in intriguing argument that is worth your time to check out . . .


The Economy is Just Fine . . . (October 19th, 2008)

Barron’s Bad Book Recommendations (August 15th, 2009)

Get Ready for $150 Oil
Barron’s, JULY 2, 2011

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