(By Louis Basenese) In its September Oil Market Report, the International Energy Agency (IEA) undermined every conceivable price forecasting model on the planet, saying…
"The best forecast of crude oil spot prices is simply the current price of oil."
Are you kidding me?
I'll be the first to concede that predicting every short-term jot and tittle in prices for any particular asset is impossible. Otherwise, day traders would dominate the Forbes 400 list. (To date, none have ever made the list.)
But predicting long-term trends? That's not impossible. And I can prove it with one simple question…
Five years from now, will there be more people on the earth?
Well, when you consider that more people are born than die each year, the answer is blatantly obvious.
Heck, the United Nations has even pinpointed the exact year that the population will hit eight billion (2025).
Yet the IEA is telling us that long-term oil prices can't be predicted?
Puh-lease!
As I pointed out yesterday, a population boost naturally leads to increased demand for all commodities, particularly oil. Even the IEA knows it.
The agency estimates that global fuel consumption will rise from 89 million barrels a day now to 95.7 million barrels – in just five years' time.
To meet the increased demand, we can't simply say, "Give me more oil." We need to increase production. And additional production comes at a greater cost.
Why? Because the newest oil discoveries are in deep-sea deposits – ones typically buried under thick layers of sand, salt, or shale, making them difficult to extract.
As a result, the cost of exploring and producing oil from the newest and most expensive wells now exceeds $100 a barrel. Compare that to $50 to $70 a barrel before the financial crisis, and $20 a barrel a decade ago.
In other words, we've got the oil to meet the increased demand. We just can't produce it as cheaply as we once could.
For that reason alone, oil prices need to remain at levels of $80 and $90 a barrel. If they fall any lower, unfavorable economics will force energy companies to cut production, which, in turn, will push prices back up.
Clearly, the "new normal" for oil prices is higher, not lower. And I'm willing to stake my reputation on that "prediction!" (Take note, IEA.)
Macro Issue, Major Impact
The main reason every American should give a hoot about the future price of oil is because it determines the "pain at the pump" (i.e. – the future price of gasoline).
Newsflash: It's going higher, too, which Californians know full well.
The national average price for a gallon of regular gas is now $3.713. That's up 10.2% from $3.368 per gallon a year ago. And up 35.9% from $2.732 per gallon three years ago.
The Californians among us have been paying more than $5 a gallon. Ouch!
The bottom line is this…
Just like you can't walk into a Five and Dime store and buy penny candy anymore, the days of $30 oil – and $1 gasoline – are gone forever, too.
Fear not, though.
As I mentioned yesterday, my colleague, Karim Rahemtulla, has developed an ingenious way to reset gas prices back to the year 1993.
And he's going to share all the details at exactly 10:00 AM EST on Wednesday, October 31.
On that day, we're launching our "forever free," twice per week, Oil & Energy Daily e-letter.