In May 2005, a Goldman Sachs (NYSE:GS) analyst shocked the world with the following prediction:
"We believe oil markets may have entered the early stages of what we have referred to as a 'super spike' period -- a multiyear trading band of oil prices high enough to meaningfully reduce energy consumption and re-create a spare capacity cushion, only after which will lower energy prices return."
How high did Goldman think was "high enough?" His mark was $105 per barrel. To date, we haven't yet hit that peak, but with oil prices now subsiding toward the $70-per-barrel range, voices are already emerging to challenge Goldman's doomsday scenario. The source of one of those voices: oil majorBP (NYSE:BP).
In a recent interview with Germany's Der Spiegel, BP CEO Lord Browne implicitly challenged Goldman's year-old assertion, saying it "is very likely that oil prices will range in the medium term around an average of $40, and in the long run it could even be $25 to $30." Lord Browne cited such price-depressing catalysts as new oil finds in the Caspian Sea, untapped fields in Russia and West Africa, and improved rates of extraction from existing fields, all of which could act to increase supply even as high fuel costs depress consumer demand.
So is it time to short ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP)? Hardly. For one thing, in the near term, Lord Browne says factors such as Iran's off-again, on-again threats to slash exports could prevent prices from falling "very much in the near future." For another, oil companies in general, and these two in particular, are the very ones working in places like Russia, and making the improvements in technology that will control when and how much prices fall in the "less-near" future.
Even so, investors who believe that a CEO with decades of experience in the oil industry might know a thing or two about the cyclicality of the business should take heed of Lord Browne's words -- especially if their portfolios are overweighted in companies involved in expensive production projects like the Canadian oil sands. As my Foolish colleague Robert Aronen has mentioned, these projects will require oil to sell for at least $30 per barrel to remain profitable with existing technologies. With Lord Browne now warning that $30 is not inevitable, it's a race against time to see how quickly firms like Suncor (NYSE:SU), Imperial Oil (AMEX:IMO), and Petro-Canada (NYSE:PCZ) can dig up and melt down their profitable tar before the oil bubble bursts.
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Fool contributor Rich Smith does not own shares of any company named above.
