Historically, asset price booms have been accompanied by arguments that a "new paradigm" has been reached, whether the issue is 19th Century railroad stocks, 1920s agricultural prices, or dot-com stocks in the 1990s. Every bubble has deflated, ignoring the chorus of opinion to the contrary, and mineral prices are not immune.
Oil, however, has been the primary exception, with post-1973 prices remaining about 50% above the historical trend, leading many to think that it is not subject to the market forces that affect other commodities. True, prices during the past decade have been extraordinarily high, although the increase was not unanticipated; some had warned of more-volatile prices due to market tightness. Even so, prices have been far above either predicted or historical levels, and with economic recovery just beginning and prices remaining above $70/bbl (as of this writing), many are predicting that prices will recover, reaching $100/bbl or more within a few years and climbing from there. The US Department of Energy, for example, predicts prices at $123/bbl in 2030, while the International Energy Agency expects them to be $115/bbl. Many, particularly in the investment and peak oil communities, see them likely to be even higher.
The arguments are broadly held: Non-OPEC has peaked (more or less); demand will soar, as Asian economies boom and prices prove ineffective in reducing consumption; members of the Organization of Petroleum Exporting Countries won't (or can't) raise capacity to meet new demand; and costs have risen, forming a new floor. The amazing thing is that all of these arguments were made in the early 1980s, when prices had dropped from the 1980 peak, but remained two to three times higher than pre-1979 levels. Indeed, in the months before the 1986 oil price collapse, the consensus was that prices would soon recover to more "normal" levels.
Is the price likely to remain in the $70-80/bbl range, which would be at least three times the historical average? If, as some argue, costs are now permanently higher due to depletion and the need to exploit more-difficult deposits, this could mean that the new "floor" price is likely to be much higher than before. Alternatively, if the cost increases of the past few years were mostly cyclical, prices should drop to something closer to the historical level of $30/bbl.
OGJ
