Commodities | Aug 29 2006
By Chris Shaw
Volatility in oil prices has been a major influence on stock prices in recent weeks as fears of hurricanes and concerns over the situation in the Middle East have waxed and waned, resulting in a lack of any real trend for equity markets.
One reason this has been the case is the concern a sustained increase in the oil price could tip the US economy into recession, which obviously would be negative for equities given the impact on corporate earnings and domestic consumption.
But such fears may be unfounded according to a recent survey conducted by the US-based National Association for Business Economics (NABE), which in the early weeks of this month asked 195 of its members for their outlook for oil prices.
The first finding of note is respondents estimate an oil price of about US$100 per barrel would be required to push the US economy into a recession, but the majority of those surveyed don’t see such a price as likely. When asked to forecast the oil price by next summer the median response was US$74.60 per barrel, which is higher than current levels, but still well below any doom scenario. The 25th percentile forecast was US$65.30 per barrel, while the 75th percentile forecast was US$84.80 per barrel.
Iran is still a point of concern though, as the price forecast would increase to more than US$80 per barrel if supply from Iran was cut off, with an absolute worst-case scenario of supply from both Saudi Arabia and Kuwait also being cut resulting in a forecast of a price of around US$120 per barrel.
Among the respondents about half see little prospect of the US being able to reduce its oil demand through the use of alternative technologies such as ethanol, biodiesel and wind power by enough that it would no longer need imports from the Middle East. On the plus side, about half of those surveyed take the view the world has enough oil, it is just that the US is too dependent on the Middle East for its supplies.
Conservation and environmental issues are also gaining increased attention as about 16% of respondents see global warning as a major issue for the world going forward, which suggests ongoing pressure to cut back on the use of fossil fuels and an increase in the adoption of alternative technologies.
Somewhat surprisingly, nuclear power was not seen as very likely to replace oil as a major power source, with more respondents suggesting geothermal and hydrogen power sources are more attractive options longer term.
