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The Honolulu Advertiser
Posted on: Wednesday, December 27, 2006

Oil-price forecasts mixed for 2007

By Mike Meyers
McClatchy-Tribune News Service

Want to drum up a debate? Ask what a barrel of oil will cost next year.

Oil prices are expected to remain volatile in 2007, but experts are sharply divided about whether the price of a barrel of crude is headed up or down.

Some leading forecasters expect oil prices to rise at a double-digit pace in the year ahead. Others including the U.S. Department of Energy and the World Bank say oil prices most likely are headed down.

The debate centers on assumptions about a complex mix of variables, including the behavior of oil consumers from the United States to Eastern Europe, the prospects for new conflicts affecting oil-producing nations, the reliability of current production estimates from the world's proven oil fields, and the severity of the Atlantic hurricane season, among others.

"Relentless pressures that come out of demographics and per-capita income weigh heavily on where demand is going," said Ed Morse, chief energy economist at Lehman Brothers, a New York investment banking firm. The price of West Texas intermediate crude, an oil industry benchmark, this year has averaged $66 a barrel.

The average price of oil next year will rise to $74 a barrel or more, driven by a growing middle class in Asia, Eastern Europe and oil-producing countries, including Saudi Arabia, Iran and Chile, Morse said.

Meanwhile, in the United States, a growing population of teenagers will push higher demand for gasoline and other petroleum products.

"Eighteen-year-olds tend to buy more cars and drive more," Morse said.

The risk that Lehman's forecast is wrong, he said, rests "on the upside, not the downside."

Warm weather moderated demand for fuel oil during the fall, but in Morse's view, two back-to-back warm winters seem improbable.

More than eight of 10 private analysts surveyed recently by Deloitte & Touche expect higher oil prices in 2007.

The days of oil prices in the mid-$50 range will be a distant memory next year, said Mary Novak, managing director at Global Insight, a leading economic forecasting firm based near Boston.

Oil prices will range from $60 to $65 a barrel in 2007, with gasoline prices averaging about $2.25 a gallon, according to Global Insight.

One significant restraint on oil demand is the expected slowdown of the U.S. economy in the first half of next year, Novak said.

The Global Insight forecast also presumes that OPEC will fail, as it has in the past, to limit production by oil producers in the cartel.

"The situation is that we need OPEC to increase available supply," Novak said. "They're only going to do that at a pace that suits themselves."

Optimists about lower oil prices ahead offer a different interpretation of the economic, political and oil-supply outlook.

"We expect $55 a barrel by end of 2007," said Rakesh Shankar, senior economist at Moody's www.Economy.com. "We expect, in 2008, oil to fall to $45 and bottom out."

The often-quoted Web site's economists believe the Asian economies will slow from near double-digit growth rates in the next year.

"It's kind of silly to think the global economy will slow and expect oil prices to hold," Shankar said. "China's demand growth already has slowed from peak levels of 2003-2004."

China and India recently began to roll back government subsidies on imported oil, pushing domestic petroleum prices higher. "They've cut their subsidies curbing demand," he said.

If Moody's economists are right, oil prices won't be a major economic story anytime soon.

"We don't think the energy prices will be high enough to have much impact on U.S. and global economic growth," Shankar said.

World Bank economist Hans Timmer said increased oil exports by Russia and some African countries are coming into global markets just as petroleum demand is expected to grow at 1 percent a year over the next few years a decline from 2 percent annual growth earlier in the decade.

"Without additional supply reductions, which are of course possible, we don't see prices anywhere near the highs of the last year," Timmer said. "Seventy-five dollars (a barrel) was an overshoot."

The World Bank now expects oil prices to drift down to an average $40 a barrel over the next several years. That's even less than the $55-a-barrel long-run forecast of the U.S. Department of Energy.

But Timmer said "low prices" have been redefined.

"That's a big change from our review of two years ago, when we expected $20 a barrel in the long run," he said.

At the U.S. energy agency, economist Neil Gamson expects 2007 to be short on oil news.

"We expect things to go a lot more smoothly on the national level," he said. "Gasoline prices should be somewhat lower than the last driving season."

Gasoline prices averaged $2.83 nationwide in the third quarter of this year. The Energy Department expects no more than $2.60 a gallon in the second and third quarters of 2007.

Oil-market jitters are less likely to arise next year, in Gamson's view.

"We had a spike in the world oil price in second and third quarter 2006," he said. "Some of that was due to an anticipation of a repeat of a hurricane season (interrupting oil field and refinery output), which never did happen."