Oil price forecasts at $150 per barrel - Another bubble?

February 20, 2008

Experts are forecasting oil prices to rise to $150 per barrel in 2008. This is partly caused by an 1.7 billion barrel per day (bpd) increase in demand, and partly due to speculation. (Source: IHT, Crude sets another record, 2/20/08)

What high oil price forecasts mean:
If the U.S. and possibly the world economy is facing a possible recession, how can oil prices be expected to increase? Precisely because of the cause of the economic slowdown has made investors look for relatively safe havens. Massive defaults in subprime mortgages and asset-backed commercial paper is now spreading to holders of those investments. Holders include not only banks and hedge funds, but also municipalities and corporations.

Many investors don't really know who will default next, and so are hesitant to buy either stocks or muni bonds. Real estate is also being avoided, as the subprime residential real estate downturn is now spreading to commercial real estate.

Therefore, the only asset classes still untainted are oil and gold. Furthermore, since oil is priced in dollars, the dollar decline further increases the price of oil. Overseas oil companies must meet their profit margins, as well, and so need to keep the price of oil as denominated in their own currency stable. In other words, they must raise the price of oil in dollars just to stay even.

However, if prices aren't driven by the market forces of supply and demand, then the risk is simply being transferred to another asset class. In other words, this bubble could abruptly burst, too.

By the way, don't expect higher oil prices to reduce the U.S. need for oil. In the EU, taxes make the equivalent price of oil about $250 per barrel, and no one has stopped driving. (See Exclusive Interview with Gavin Longmuir, 7/19/06)

Action steps:
To profit, make sure you have commodities mutual funds, including oil and gold, as part of a well-diversified portfolio. Don't jump on the oil and gold bandwagon, because it could be another risky bubble forming.

To protect yourself from high oil and gas prices, think about ways to decrease your own personal use of oil. This will help not only the greening of the planet, but the greening of your wallet, as well.

For other ideas on how to protect yourself from the high cost of oil, get the WorldMoneyWatch Special Report “Oil’s Hidden Threat”.

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