Irrational Exuberance
Tom Kloza, chief analyst of the Oil Price Information Service, says the recent run-up in oil prices is due more to speculation in the commodities market than to supply shortages and the growing economies and populations in Asia. "The EIA has been steadfast in saying that it's all about supply and demand, but I disagree," Kloza contends.
"It's not the demand from average Joes, but demand from hedge funds, banks, commodities pools and so forth that's responsible for taking crude oil from $70 to $110 a barrel. There are a lot of huge funds that are invested in commodities, and one of their favorites is crude oil.
"I estimate that there's about $25 billion in oil futures — and that's $25 billion speculating on a higher price right now than a lower price," Kloza adds. "I think you'll find a lot of people in the oil industry will agree, and they're not going to complain if Wall Street is carrying the water for them. They've been the beneficiaries of that irrational exuberance."
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Like many who follow the oil industry, Kloza believes that the price of crude oil is "overheated" and due for a correction.
"I compare it to the housing market a few years ago," he says. "It's been lifted by the sentiment that the oil market is a place where you can't lose money and values will move up higher and higher every year. But I think we'll see less of a bubble burst and more of a letting the pressure out like we've seen in the housing market. It could be a template for what we'll see in oil."
The EIA's MacIntyre agrees and says crude oil prices will be softened by new production streams. But he predicts prices will rise before they lower, mainly due to seasonal demand this spring, when pump prices traditionally shoot up as predictably as May flowers.
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"Along with many other analysts, we've been expecting crude oil prices to decline for many months, and they keep going up," he says. "In March they were down considerably, but the expectation is not just that the price will slow demand a bit more, but that a lot of non-OPEC production that has been delayed will catch up to us later this year and next year. And as the market starts proceeding with that production, prices will start dropping."
"From what I hear, oil companies are investing based on $55 to $75 a barrel oil," says Tippee. "Historically, that's still pretty valuable oil. But I think that's what we'll see and gas prices will come down. But the big question is when."
Wait for the Fall
Just don't expect to see any dramatic price drops until well after the summer driving season, MacIntyre warns. "We expect gas prices to increase and peak nationally somewhere around $3.50 a gallon," he says. But consumers could see some relief by the end of 2008 and into 2009 as new production comes online.
"A couple of things are going to work in the favor of a more temperate price of gasoline down the road," adds Kloza. "Ethanol is going to displace a lot of the demand for gasoline because it's going to take 10 percent of gasoline out of the formula and replace it nearly everywhere east of the Mississippi this year. The second thing is prices won't be up a spectacular amount from previous years; it may be up a percentage point or so. But this is not the start of the $4- to $5[-dollar-a gallon] apocalypse for gasoline."
Doug Newcomb has been writing about car electronics since 1988 as an editor at Car Audio and Electronics, Car Stereo Review, Mobile Entertainment and Road & Track Road Gear. His new book, Car Audio for Dummies, is available from Wiley Publications.
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