The Daily Reckoning reports that Goldman Sachs is calling for the oil price to return to the US$100 per barrel mark - Goldman Calling For US$100 Oil By 2011.
When Goldman Sachs makes a prediction about the price of an asset, you can never be sure if it's a self-fulfilling prophecy or a psychological investment operation exercised by an elite trading team. Is Goldman calling for US$100 oil by 2011 because it's already long oil? Or is it just early on the trade in predicting that oil demand will recover faster than oil supply will grow and that the result will be higher prices this year and next?
Goldman's oil analyst Jeffrey Currie is referring to what we termed last year, "The Long Aftershock." It refers to the 2007 oil price crash sowing the seeds for the next oil bull market. Currie says his analysis leads to the conclusion that, "By 2011, the [oil] market is back to capacity constraints...The financial crisis created a collapse in company returns which has significantly interrupted the investment phase."
You can't find oil that you're not looking for. And the oil price crash-along with the credit crisis-wiped out the exploration budgets of major oil companies. Obviously, in a free market this would be self-correcting. Higher oil prices would attract more investment and new exploration. All things being equal, more people would look for oil. More people would find it. More people would produce it. And supply would again match demand.
But life is not a textbook. And finding oil and producing large deposits of oil cheaply is not an academic exercise. The 'Peak Oil' theory is often deliberately mischaracterised by its opponents as concluding that the world is "running out of oil." But that's not the case.
The world is running out of cheap, easy-to-find, inexpensive to produce, and easy to refine oil. There is plenty of oil. But is it "economic" oil? Well the answer to that is no! Whether it's political risk (where supply is artificially tight because of regimes unfriendly to U.S. or Western interests), or it's just several miles under the surface of the ocean, finding and pumping oil to meet the world's 85 million barrel per day demand is not an easy task.