Really, Really Cheap Oil
Fortune Magazine
Gasoline for $2? Michael Lynch says those good old days are just around the corner.
Don't sell that SUV just yet. Oil, at a recent $56.50 a barrel, will fall to $45 by mid-2007 and could dip briefly into the 20s in 2008. Sometime next year you are going to see a $1.95 price on a gas pump.
So says Michael C. Lynch, 51, president of Strategic Energy & Economic Research in Amherst, Mass. His reasoning: New supply, coming online from all corners of the world, is more than ample to satisfy growth in demand and sufficient even to withstand an embargo against Iran, which produces 3.75 million barrels of oil a day. Lynch argues that the threat of disruptions--nuclear brinkmanship, war, terrorism, hurricanes, pipeline corrosion--has larded oil prices with a $20-a-barrel risk premium. As these perils recede, oil prices will fall.
A refreshing view. Over the last two years, as prices have soared, proponents of the Peak Oil theory--which argues that we will soon pass the point of being able to replace reserves as fast as they are consumed--have resurfaced in force. Of course, folks have been predicting the end for 50 years. In fact, there's still plenty of fuel to be sucked out. Consider that over the past 100 years the U.S. has drilled 3.5 million wells into most of its oil basins yet still produces 5 million barrels a day. In the Middle East only 50,000 wells have been drilled into far more prolific basins, yielding 15 million bpd. While the world has consumed maybe 1 trillion barrels of oil in the last century, there are at least 1 trillion barrels waiting to be exploited, reports the U.S. Geological Survey. Add to that an estimated 1 trillion barrels of oil sands resources and another 2.8 trillion barrels of oil shale, and we can all afford to put down our "End Is Nigh" placards. "The oil price spike was caused by geopolitical issues that can be fixed or overcome," says Lynch. The real issue is geology. Recent discoveries--and the prospect of new ones--sketch a bright future for our oil needs.
