The real value of oil is “way, way, way above $80” according to a leading analyst. Paul Horsnell, head of commodities research for Barclays Capital, says it is hard to see the price falling below $80, even allowing for a lot of pessimism about the economy, and that the long run price is likely to be in triple digits – but not because of resource constraints.

In an interview with and Global Public Media, Horsnell argued that the market is in a period of ‘price discovery’, where it was not yet clear how high the price would have to rise in order to bring on additional supplies or reduce demand.


Speaking on the sidelines of the World Future Energy Conference in Abu Dhabi last week, Horsnell said the run-up to $90-$100 per barrel was not primarily due to geology, but to above ground factors such as the “short sighted” oil industry cost cutting of the 1990s. However he does acknowledge that decline rates are turning out to be higher than expected – “so you need to bring on more supply each year just to stay still”.

Looming recession in the West is unlikely to depress the oil price because of demand growth from China, the Middle East and India, which represents a “major economic transition, a big shifting of the tectonic plates of the global economy”.

Upward pressure on the oil price would also come from industry bottlenecks and growing demands on the budgets of producer nations, many of which need to provide for booming populations. But although producer nations need more cash, perversely a rising oil price may encourage them to produce less oil: “Russia does not need to be particularly aggressive about output growth if the price is $90”.

In these circumstances, bringing on large amounts of additional supply or constraining demand would require triple digit oil prices, even without a non-OPEC or global production peak. But if geological constraints do start to bite, the price is likely to go higher still.


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