Oil executives still see prices dropping

In a week when oil price forecasts flashed from $150 to $200 per barrel, industry executives chimed in yesterday with a prediction that crude would fall below $100 by the end of the year.

What gives?

One industry expert did not put much stock in KPMG L.L.P.'s survey of 372 oil and natural-gas executives. The results, showing that 91 percent of them thought oil prices would be lower at the end of the year, were released yesterday.

Light, sweet crude for June delivery settled up $2.27 at a record $125.96 yesterday.

Industry executives "have consistently underestimated price inflation with respect to oil and the sustainabilility of higher oil prices," said Bill Herbert, head of research at Simmons & Co. International Ltd., a Houston investment bank specializing in the energy industry.

History drives their bearishness.

"A lot of the folks running these companies are burdened with the accumulated scar tissue of the last 20 years when you had difficult conditions for the industry," driven mainly by overcapacity and a lack of discipline on behalf of OPEC, Herbert said.

In the sixth year of rising oil prices, it is easy to forget that for most of the period from the mid-1980s to early 2002, oil traded for $20 a barrel or less.

In the past, such a dramatic surge in prices would have enticed producers to bring significant new supplies to market, causing prices and profits to plummet.

That is not happening now because it has proved to be more difficult than anyone thought a few years ago to tap new supplies. Meanwhile, demand - especially in developing nations - has been more resilient than predicted.

In June 2006, highly respected Cambridge Energy Research Associates in Cambridge, Mass., predicted oil-production capacity would climb significantly and possibly push prices below $40 a barrel by 2007 or 2008.

This week, Cambridge said supply disruptions in Venezuela, Nigeria and elsewhere kept a lid on spare capacity, which is what typically causes prices to fall. It also said most oil exporters have so much money flowing into their "rainy day oil funds" that they feel little urgency to expand production.

Meanwhile, integrated oil companies such as Exxon Mobil Corp. are kept on the sidelines of major oil-producing nations such as Mexico or Russia.

Exacerbating those conditions has been the decline in the U.S. dollar - the currency oil trades in - relative to the euro and other currencies.

That means people who buy oil in euros, for example, are not seeing the same run-up in prices. Over the last year, the price of oil in euros has climbed 78 percent compared with 103 percent in dollars.

An OPEC official said Thursday that a continued decline in the dollar could drive oil to $200 per barrel.

"They want to influence the price of oil using psychology," said Shawkat Hammoudeh, a professor of economics at Drexel University.

Goldman Sachs Group Inc., which caused a stir in 2005 with a prediction that oil would reach $105 a barrel, said this week that strong demand in developing nations could drive oil to $150 to $200 a barrel within two years.

"Should crude oil reach $200 a barrel, retail gasoline prices will average nationally from $5.50 to $6" per gallon, said Brian L. Milne, refined-fuels editor for DTN, a business information service.

Consider that a gallon of $200-a-barrel crude oil - before a refiner even touched it - would cost $4.76.

Herbert said that he does not know where oil prices are going, but that "the fundamentals we are witnessing . . . are not going to be ephemeral. The only thing that will upset this apple cart will be a recession that is very, very bad and deep" all over the world.