Duelling Fools: The Price Of Oil

Published in Investing on 5 August 2009

Will the price of oil soar or is it set to plunge? Two Fools battle it out.

It's time for Duelling Fools once again. Two Foolish writers take opposing sides of a topical financial argument and then we ask for your view.

This week the battleground is the price of oil. It seems incredible now but towards the tail end of 1998 barrels of oil were changing hands for less than $10 a time. In the last year though, the oil price has gone from $147 down to the low $30s and back up above $70 again. 

So we asked Harvey Jones and Malcolm Wheatley what they think will happen to the price of oil over the medium term (which we've defined as the next two to five years).

> Here is Harvey's piece on why 'The Price Of Oil Is Set To Soar'

> And here's Malcolm's riposte 'The Inevitability Of Cheaper Oil'.

> Tell us what you think will happen in our Duelling Fools poll.

Last week's Duel

Banking shares was the topic of last week's Duelling Fools. A surprisingly sizable 63% of you agreed with David Holding that now is the time to buy. A mere 24% are going to follow Bruce Jackson's advice and steer clear of the sector.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

bluepiper61 05 Aug 2009 , 11:53am

I hope it falls as I use oil for heating and last year the bill was over £1000, plus I had electric on top of that. If Malcom is right and the national reserve top ups stop then supply could well outstrip demand and we'll see a fall in the next few years. However we need to use that time to develop new sources/forms of energy, because one day the oil well will be dry!

alex15cars 05 Aug 2009 , 2:10pm

It would be great to see the price of oil fall to a realistic level, but I cannot see it happening, due to the greed of oil companies, and the bigger greed of the government.It may be at a lower price now, but has the price of fuel fallen? NO!Our greedy government will ensure that it won't, by slapping extra tax on.

fishfearme75 05 Aug 2009 , 3:23pm

Working in the oil sector it is always a good sign when the oil price rises, contracts can be secured and day rates will rise alongside demand, allowing for offshore personnel to secure a longer term of employment. This is not always an ideal situation as fuel prices rise then enivitably the cost of living increases (shame that they dont fall at the same rate as oil price right enough)

roderickeaton 05 Aug 2009 , 3:30pm

The comment of bluepiper61 seems essentially likely but the price per barrel at the wells will not be passed on to the British people through petrol and fuel oil price reductions. The government will use 'climate change' that isn't happening as the excuse to increase oil tax. That is of course the prime function of the hyped-up AGW theory. Hence, I agree in the main with alex15cars.

It is likely, albeit a long way in the future (maybe the turn of the century), we will need to start to make up imported oil supplies with new or home sourced fuels e.g. hydrogen injection or oil from coal (of which we still have an abundant supply). Electric transport may become viable too by then, if we have sufficient power generated to charge-up millions of advanced battery technology vehicles.

The way Brown is going with his zero carbon economy, we will probably be using yak carts by then while the Chinese drive round in their Rollers and Bentleys if we have any to sell them that is.

JDEvolutionist 05 Aug 2009 , 3:51pm

In reality it depends on how soon the current euphoria, stimulated by quantitive easing, takes to die down. There is a point at which the consequential devaluation (as a result of qe) in the value of currency must come to the surface and the reality of what debt real means becomes abundantly evident - the real recession will start to bite and demand for energy will fall. This will impact on the price of oil and, even if in dollar terms the price goes up, the actual price (in terms of what - gold?) will fall. One of the failings in current economic thinking appears to be its failure to account for the inherent inertia that resides in the systems built by globalisation and the impact it has on when effects take place. Long term the value of oil will rise as its scarcity increases and demand continues to rise.
(Repeat from Harvey Jone's article page)

gordonbanks42 05 Aug 2009 , 5:11pm

@roderickeaton: you will most certainly not be allowed to rise around in yak carts - the extra "greenhouse effect" from the methane produced would far exceed (or so they say) the CO and CO2 emissions we have at the moment.

alwayspays 05 Aug 2009 , 8:39pm

I agree with the comments that price per barrel falls will always be offset by a rise in taxation and It will still happen when god forbid the other lot win the next election. But I believe it was the extortionate price of oil that triggered the recession in the first place as people stopped paying thier mortgages before stopping buying fuel.
As soon as the prices creeps up again the loans will stop being paid again and we'll bounce into another double dip recession.

Fingered 05 Aug 2009 , 8:53pm

On a bear market rally bounce now in my view .....so a drop to 20 or under is far more likely long before it goes north over 147 .

Like the Age of Steam, the Age of Oil will also one day end. Mankind is very inventive.

These days for example, you can get something about the size of a toolshed, you dig a big hole, stick it in, seal it with concrete and you don't have to go back to refuel it for a decade and it powers a small town with oooodles of KW of power for pennies.

Fingered 05 Aug 2009 , 8:55pm

..................it's a non-weapons grade mini nuclear reactor of course.

Fool1265542896 06 Aug 2009 , 9:33am

Hydrogen production from solar, wave power, wind power, nuclear, geothermal, hydro, what ever you have locally is the way to go. The technology for hydrogen fuel cells is ready, just high cost. However, if you add the fuel over 5 years, fuel cells start to get affordable, assuming sheap hydrogen. Oil and coal will eventually be the reserve of plastics production, even if from shale, small multi pocket wells, ... The real losers will be the arabs. Higher temperatures, lack of oil revenue, water scarcity, profligacy, laziness, ... They could produce cheap hydrogen, but how to transport it safely with all the mad mullahs exhorting the poor in their areas to blow all and sundry to kingdom come ...

My money is on a slight rise for now and plenty more drops and rises as the human race blunders around. Since timing is all improtant, I see that the oil companies are not investing & remember that this is their game 24/7. The equipment they use is not being bought, which indicates a drop / evening out for a while until they start spending on replacements, let alone new projects, then a few years before they can increase production.

Wells can be shut down easily, but are harder to start up again.

kgswift 06 Aug 2009 , 12:55pm

Read "The last oil shock" We are already at the limit of production. The price will rise as soon as the global economy recovers and as such limit the recovery.

oswizuk 07 Aug 2009 , 9:53pm

The likelihood is that both Fools are going to be proved right in part - though on completely different time-scales.

The recent build up of oil inventories by countries (including the USA, where the recent inventory report showed higher than expected stock levels), together with a (so far!) benign hurricane season, all on top of the global recession is likely to cause a short-term easing in the crude price...
...but not by much, nor for long!

The long-term increase in global demand and acceptance of Peak Oil suggests that the medium/long-term direction of crude prices is one-way: UP!

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