On May 22, in the UK’s House of Commons, UK Energy Minster Malcolm Wicks claimed that the huge increase in oil prices during recent months had caught everyone by surprise.
The prior week, in a parliamentary written answer, it emerged that BERR, the ministry responsible for oil&gas, thought that the price of a barrel of crude would be about $70 in 2020.
During the May 22 Commons exchange sparked by a question from Norman Baker, MP for the Lewes constituency, Wicks said: “At the moment, of course, it is difficult to estimate what the price of a barrel of oil will be next week, let alone in 2020, as the honourable gentleman seeks to persuade me to do.
“Obviously, our department, while not forecasting oil prices, does publish future price assumptions going forward to 2030.
“We obviously regularly review these and consult on them, but he will appreciate that the huge increase in the price of a barrel of oil has caught the whole world by surprise and we are in, frankly, difficult and uncharted waters.”
Baker said in reply: “It certainly caught the minister’s department by surprise because a parliamentary written answer that he gave me last week showed that his department thinks it will be $70 a barrel in 2020, so perhaps I can help him with his own figures, which suggest that he may be rather out of touch.”
Others might assert the same, especially since there has been ample warning of rapid price escalation, not least from Houston energy investment banker Matt Simmons, who famously bet on the price of oil hitting $200 a barrel in 2010.
The Simmons bet was with conservative New York Times columnist John Tierney, a noted sceptic of the banker’s views.
The Simmons-Tierney bet is a gentleman’s bet made in August, 2005, the stake being $10,000.
The subject of the bet is the year-end average of the daily price-per-barrel of crude oil for the entire calendar year of 2010. The bet is to be settled on January 1, 2011.
Their final agreement was a commitment to tabulate every closing price-per-barrel of oil for each market day of 2010, then average out those prices for the entire year from January 1 through December 31, (adjusted for inflation to 2005 prices). If the year-end adjusted average comes out to $200 or more per barrel, Simmons wins. If it averages out to $199.99 or less, Tierney gets the lot.
The winner takes the entire $10,000, plus interest ($5,000 from both parties, currently sitting in escrow).
The bet was made public in the New York Times on Tuesday, August 23, 2005, in a piece called “The $10,000 Question”.
In the light of such events, plus the many signals sent out by various organisations, even the International Energy Agency, it would appear that BERR should have been more vigilant in reviewing its assessments and not been taken by surprise the way it appears to. While there will likely be a correction to the current run of prices – they have lately hit $130 or so – the belief at Energy is that such a correction might see the price of a barrel slide to the $90-100 range. But it is unlikely to fall below that.
There would appear to be an element of “bubble” due to speculation. However, supplies are nonetheless tight, despite ample capacity, and demand is very robust. There have been several instances of contango lately – that is where the price of a commodity (in this case oil) for future delivery is higher than the spot market price.
Moreover, it is understood that the Organisation of Petroleum Exporting Countries has set an unofficial floor of $80 per barrel and that some of the oil majors are apparently now screening new projects for viability around $60 per barrel equivalent.
This is dramatically higher even than two years ago and light years from the North Sea position at the end of the 1990s, when operators were striving to work a threshold price of $10 or even less.