Debate raging over oil

[notiCIas]

Debate raging over oil

Goldman predicts a spike above $100 but Morgan Stanley sees a tumble. What's it mean for the U.S.?

June 22, 2005: 1:42 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - With oil creeping near $60 a barrel, there's a debate raging in the energy markets over whether crude will soar above $100 or take a tumble as the energy bubble bursts.

Two prominent investment banks have come out with very different forecasts on where oil is heading. In March, Goldman Sachs said oil could top $100 a barrel, dubbing the phenomenon a "super spike." But earlier this month, an economist from Morgan Stanley predicted oil prices could collapse.

So who's right?

Well, maybe nobody. Despite these headline grabbing reports, most economists and energy analysts say the price of oil will probably float between $40 and $60 a barrel for the foreseeable future. Whether that hurts economic growth at home and abroad is another concern.

The argument against oil spiking is that demand from the United States and other developed countries would taper off if prices headed much higher. But demand for oil still appears to be strong enough from emerging economies like China and India to keep the price of oil from plunging too far.

Oil's well between $40 and $60
And the good news, according to several economists, is that as long as crude remains in a $40 to $60 range, oil probably shouldn't have a huge negative impact on worldwide economic growth.

"$60 oil is not good for our economy but it's not going to be a doomsday scenario. The economy is not going to hit a brick wall," said John Norris, chief economist with Morgan Asset Management in Birmingham, Ala.

Of course, the price of oil is an important measure to watch. After all, high oil prices act like a tax on businesses and consumers. And many economists blamed high prices for the soft patch the economy hit late in the first quarter as consumers had to pay more for gasoline and to heat their homes during the winter.

The hope, however, was that high oil prices would just be a temporary drag on the economy. Speaking at an event sponsored by Reuters last week in New York, David Resler, chief economist with Nomura Securities International, referred to the first quarter weakness as, "not a soft patch but a snow drift that has since melted."

Lehman Brothers chief economist Ethan Harris, speaking at the same event, said he was not overly concerned about the recent run up in oil prices. He noted that oil has marched steadily higher in recent years mostly from rising demand, not because of worries about supply.

"The adjustment to higher prices has been fairly orderly. It's not a 70's style shock," said Harris, referring to soaring oil and gas prices after the Organization of Petroleum Exporting Countries reined in production. "Oil prices do have an effect on the economy but it's not dramatic. It's a problem but not at the top of the list."

James Glassman, senior economist with J.P. Morgan Chase, added that high oil prices can't be viewed only as a negative since they should lead to stronger profit growth for energy companies -- something that eventually should contribute to economic growth.

"The thought of oil as a tax doesn't sit right with me. It may be a tax on consumers but it's a plus for producers," Glassman said. "If you follow the money, my loss is someone else's gain and what starts out as a tax quickly becomes a more balanced picture."

Above $60: A crude awakening?
Still, if oil stays at around $60 for a prolonged period, or heads much higher, there could be more reason to worry about another economic soft patch later in the year.

"I thought oil would have been a concern since it hit $40 but the economy has digested it well," said Mark Zandi, chief economist of research firm Economy.com. But prices are now high enough that, if sustained, "they will force businesses and consumers to change their investment and spending patterns," he added.

Zandi doesn't think oil will head substantially higher, though, due to few worries about diminished supply in the near-term. To that end, the weekly report from the Energy Information Administration on Wednesday showed that crude inventories dropped by a lower-than-expected amount. Oil prices dipped slightly following the report's release.

"Inventories are ample and we're seeing more supply. Global demand is strong but I think we'll see some moderation," he said. He adds that recent declines in the price of steel and other commodities could be a harbinger of a drop in energy prices as well.

But the price of oil is also affected by political events. So another shock is not out of the question, said Morgan's Norris. He noted that continued violence in Iraq and concerns about the outcome of the upcoming presidential election in Iran could keep prices volatile.

In addition, there are fears of political unrest in Nigeria and Venezuela, two other big oil-producing nations. Finally, there have also been threats of an oil workers' strike in Norway, though it appears that a work stoppage has been averted for now.

"Everyone's oil crystal ball is cloudy right now," said Norris.