OIL COULD MAKE A BIG COMEBACK...HOW DOES $50 A BARREL GRAB YOU?

From a high of almost $150 a barrel, I have watched with much interest, the slide back down to just over $115 and wonder if John Cassidy’s (Portfolio.com’s resident economist) prediction of “the coming oil crash” really has merit.

It was December of last year that I read his piece in Portfolio.com (the magazine) and thought to myself, this guy must be crazy. Not only was he talking about a crash but more shocking was his prediction that the price of oil could drop by as much as 50%.

Here are his reasons:

New Technology

Advanced methods of locating and extracting crude mead that new sources could one day pump out nearly as much oil as some of the older sources produce today.

Global Downturn

An economic slowdown could put the brakes on demand and bring prices down.

Slowing Consumption

Global oil consumption is rising, thanks to developing countries like China and India; but these economies are becoming more serious about shifting to alternative energy sources.

Oil Exploration

Far-flung prospecting in places like Arctic Ocean, Brazil and the Gulf of Mexico will lead to an increased supply.

Ethanol Subsidies

By 2012, the U.S. is expected to spend $92 billion in subsidies for ethanol. An abundant supply of ethanol could eventually curb demand for oil.

Gas Alternatives

It’s not just ethanol that’s revving up to rival oil as the fuel of choice. Natural gas, nuclear power, and synthetic crude have become increasingly popular and are in plentiful supply.

***

At the time of the article, oil price was hovering at just around $100 a barrel so with some simple math, on Mr. Cassidy’s prediction, we would really be enjoying glory days with oil back at $50 per barrel.

Don’t laugh! At just around $115 today, we still have a long way to go but bear in mind the very valid points raised. With all conditions met and all other things being equal…I say Mr. Cassidy could well prove to be an oil-price-predicting-genius.

There is one big problem though…just one wrong move by our friends in the Middle East and Mr. Cassidy’s bold $50 a barrel oil may be the last prediction he ever made!