Oil prices ripe for sudden burst of fragile bubble
Economist foresees 44-per-cent retreat next year
Gordon Jaremko
The Edmonton Journal
Wednesday, May 07, 2008
EDMONTON - Alberta industry stayed able to stand an inevitable oil price drop by remembering lean-times lessons, a prominent international economist said Tuesday.
"Companies are investing very prudently right now and can still make good money at $70 a barrel," said Peter Hall, economics vice-president of Export Development Canada.
"This is one of the only places on the entire planet where people are optimistic," he told the Alberta chapter of the Canadian Manufacturers and Exporters Association.
"In most of the rest of the world the tide is turning in the other direction," he said in laying out a new EDC forecast rooted in experience providing credit to Canadian firms in up to 200 countries.
The agency sides with wary Alberta business and provincial budget planners in betting there's little staying power to current oil paper-barrel highs on fevered commodity-futures exchanges.
As oil shot up to a new record daily trading close of $121.84 US a barrel in New York, Hall stuck to an EDC forecast that prices will fall by 44 per cent to average $68 next year.
The agency also predicts the loonie will sink to 89 cents US, following a formula that says Canada's petrodollar loses three cents when oil drops $10.
The EDC forecast parallels the spring Alberta budget, which projects oil price erosion to an average $78 US a barrel for the 12 months that started April 1 then $74 in 2009-10 and $72 in 2010-11.
"Money is desperately trying to find a place where it can still get a return," he said in describing oil's current global use as a financial asset akin to gold, diamonds or rare art while the value of mainstays from houses to the American dollar decays.
"There is intense speculation. We have a term for that in economics. It's called a bubble," Hall said.
"The risk is squarely on the downside," he said.
"We're at a dangerous point in the world business cycle. Risks are elevated. They are about as elevated as they ever get," Hall said.
"It's amazing how short our memories can be in an environment like this," he said in an interview.
"We only have to go back a year and a half," he said in pointing out the EDC is only a sober voice in the wilderness by recent standards such as a new prediction Tuesday of $200 oil by Wall Street's Goldman Sachs Group.
Oil retreated to $50 US a barrel in early 2007 and the Organization of Petroleum Exporting Countries discussed potential actions to establish a floor of $40, Hall recalled.
It is very difficult to predict when and how a financial or trading bubble will burst, Hall said.
"You never know. A bubble is such a fragile thing that it doesn't take much. It could be a puff of economic wind, the prick of a financial needle or the intense fragility of the bubble itself," he said.
"It's equally vulnerable at all points. It's about as fragile a situation as you can conceive."
Oil and gas firms are showing they understand the precarious altitude of current energy prices by refusing to bet their future on them, Hall said.
"The lessons of the 1980s and '90s have been learned," he said. The signs include oil prices used for planning projects that only slowly and lately rose into the range of $40 to $50 a barrel from $20, Hall said.
