The future of oil: prices aren't likely to go down anytime soon.

IT'S HARD to remember, but just six years ago a barrel of oil cost only US$ 10. In mid-September of this year it was quoted in the mid-60s, and almost everyone, from steel producers to motorists, is anxious about where oil prices are headed next.

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Events almost anywhere in the world can have a bearing on supplies, from far-flung places such as the Middle East, Central Asia, and West Africa to down-home catastrophes like Hurricane Katrina. Demand is influenced by factors as diverse as China's explosive but energy-guzzling growth to a cold winter up north.

So, what's likely to happen in the next few months? What will oil cost a year from now? And where might it go from there?

Forecasts of oil prices, like the factors that affect them, are all over the map. So far, no one has predicted a return to US$ 30 oil, though nothing is impossible in this hyper-volatile market.

At the high end, CIBC, a Canadian bank, thinks we'll have US$ 100 oil within two years. At the bottom of the scale are Martin Barnes and Elena Gavrina of BCA Research of Montreal, who see a five-year average of around US$ 50 a barrel.

Goldman Sachs falls in between, projecting oil at about US$ 68 next year and averaging around US$ 60 for the next five years. The Alberta Energy and Utilities Board, conservative because the Canadian province of Alberta is a big producer of oil, thinks it will be US$ 50 or higher through 2009.

All of this assumes, of course, that there won't be another jolt to the supply chain. The bipartisan U.S. National Commission on Energy Policy believes that if the unthinkable happens--a supply disruption that affects just four percent of global output--prices could zoom as high as US$ 160 per barrel.

Katrina was the wake-up call for those who were relaxed about the recent price rise. The hurricane knocked out 1.5 million barrels a day of U.S. production in the Gulf of Mexico and neutralized about one-tenth of its refining capacity for a yet-to-be-determined time. Worse, the disabled Port of New Orleans normally receives about one-third of the oil imported from Saudi Arabia.

Prices aren't likely to go down any time soon, according to John Padilla, director of New York-based IPD Latin America, an energy consultancy that focuses on Mexico and Venezuela.

"Prices are likely to stay relatively high ... given the refining constraints," he said to BUSINESS MEXICO. "Prices may drop near year-end in part due to high inventories that are being carried, along with accounting practices that will seek to maximize profits."

But, he added, "only a marked slowdown in demand is likely to ease pricing pressure."

Ron Buchanan, who is based in Mexico and contributes to Platt's, a publication that specializes in the oil industry, is more pessimistic.

"I think it's going to continue to go up," he said. "The future of the market will be determined by continued high demand from China and the fact that countries like Mexico don't seem to have sufficient reserves to offset it."

TIED TO THE NORTH

It's not just U.S. supplies that are affected. Hurricane Katrina also damaged Mexico's supply lines.

"Mexico is both dependent on and integrally tied to the North American markets," Padilla said. "Pemex (Petroleos Mexicanos, the national oil company) will have at least 3.5 million barrels of oil stranded that is typically sold to Chevron's Pasagola refinery." Pasagola is one of the few refineries capable of handling heavy Maya crude.

Buchanan is concerned that to date there's been no movement toward energy conservation in Mexico. Instead, business is calling for government aid to cope with high energy prices, and President Vicente Fox has responded by announcing a billion-dollar energy subsidy program. Gasoline in Mexico was still selling for about US$ 2.60 a gallon even as prices across the border jumped above US$ 3.00.

Whatever happens in the coming months, and whoever ends up paying. Buchanan said, "It's quite clear that the days of cheap oil are over for Mexico."

True, there's a lot of talk these days about a megadeposit in the deep waters of the Gulf of Mexico that awaits only the arrival of high technology to tap into it--and restore Mexico's dwindling reserves.

But, Buchanan notes, so far there are only estimates of the reserves, and there's a big difference between estimated and proven reserves.

"Until they start to drill, there's no way to know if there's as much oil as they think there is," he said.

The good news in all this--if anything can be seen as good news in a run-up of oil prices--is that the current upswing has been demand-driven. It didn't happen because someone suddenly turned off the tap, as was the case in the oil shocks of the 1970s, so prices have increased gradually and so far there has been little inflation.

The other side of the coin is that prices will likely stay high longer, until the industry addresses the fallout from years of underinvestment in exploration and development and in refining capacity, which was already stretched to the limit before Katrina hit.

NEW REFINERIES

Those problems are likely to sort themselves out over time, as David Olive, business writer for the Toronto Star, points out.

"Today's highly unusual conditions are unlikely to persist," he said, "as the construction of efficient new refineries, liquid natural gas facilities and continental pipeline megaprojects in British Columbia, Central Asia and South America begin to look like lucrative propositions, all pointing to a resurgence of supply and downward pressure on prices."

In the long term, supply is not the problem. Alberta's tar sands, a reliable if expensive source of crude, are estimated to contain as much oil as the total reserves of Saudi Arabia, and the tar sands of Venezuela are even larger.

To keep prices in perspective, it's useful to remember that oil would have to rise between US$ 80 and 90 dollars a barrel in current dollars, depending on which deflator you use, to surpass the highs of the early 1980s.

Could the new realities of oil prices trigger a recession, as the oil shocks of the 1970s did?

It's possible. If the spike in oil prices were to puncture the bubble in the U.S. housing market, it might bring to an abrupt end the happy relationship between American consumers and Chinese manufacturers. Who knows how that might affect the world economy and Mexico's future exports?

"High oil prices are certainly concerning and have triggered recessions in the past," said Padilla. "When coupled with an inverted yield curve--where short-term interest rates are out-pacing long-term interest rates--and a highly valued if not overvalued real estate market, high oil prices do become worrisome."

One problem is that petroleum demand tends to be inelastic. Parents still have to fill up their gas-guzzling SUVs to drive their kids to football practice, commuters have to get to work, and large homes must be heated in winter and cooled in summer.

To return to the original question--the future of oil prices--one of the most reliable predictors doesn't give comments. It's the collective wisdom of the hedgers and speculators who buy and sell on the futures markets.

Its expectations are "steady as she goes," with prices steady to lower.

The October futures price of West Texas Intermediate oil on the New York Mercantile Exchange (NYMEX), the world's largest energy exchange, closed at US$ 64.75 a barrel in active trading on Sept. 15. The April 2006 futures were at US$ 66.87, and the October 2006 price was US$ 66.20.

Further out, prices showed a gradual decline, and contracts for delivery in December 2011 were changing hands at US$ 60.06 per barrel.

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