$50 vs $500 Oil

With news coming out today that US oil consumption is expected to decline more than at any time since 1980, I can't help but expect the price of oil to drop to around $45 - 50 over the next few months (it closed around $56 today). That is great news for many Americans who are struggling to make ends meet or who have just lost their jobs. Then I read articles like this one by Matt Simmons, Co-founder of Simmons and Co, and suddenly I can't help but hope that the Obama administration is willing to invest in alternative energy, despite the sudden low cost of oil.

It is probably worth noting that this is the same man who predicted oil would top $100 back in 2005 when it was at the low price of $58 per barrel. Now he sees recent declines in oil prices as nothing more than a mask for the real underlying problems. Here's his latest prediction:

Now he sees it climbing to $200, $300, or higher. "There really is no roof on oil prices at this point," he says.

While demand growth in the United States has slowed recently due to higher prices, the EIA projects that China and India will more than pick up the slack. And the IEA recently warned that high prices won't slow demand growth in emerging economies. If demand wants to go north of 100 million barrels a day and supply can't break 90 million (or drops below 80 million, as Simmons believes will happen within five years), it will be a price squeeze felt around the world. The peak-oil crowd will be able to declare victory - but nobody will be celebrating.

Obviously market conditions have worsened significantly since September when this article was written (when oil was ~$120), Mr. Simmons' reasoning that growth would be slowed due to high prices should be changed to include the global recession. However he and many other energy experts seem to think that oil will reach new highs once we've exited this tumultuous time. So in other words, once the markets have recovered from the credit crisis, we may see oil prices hit $200+ / barrell.

The good news is that the Chevy Volt hits dealerships near you in 2010.