How low can oil prices go from here?

John W. Schoen Senior producer • Profile • E-mail

Call it the energy dividend. After 2006 tore a big hole in consumer’s wallets and took a bite out businesses' bottom lines, a recent sharp reversal in prices may help make up for some of that pain.

A lot depends on where oil prices are headed from here. But the outlook is clouded by a host of forces, including OPEC oil ministers, hedge fund speculators, the strength of the global economy - and the weather.

After peaking at just under $77 a barrel in late August, crude oil futures have plummeted to about $50 a barrel — falling more than $10 in the past month alone. Analysts cite a variety of reasons — from a big inventory buildup last year to slower demand from unusually warm weather this winter. But they’re divided on where price are headed from here — thanks to variety of forces at work that could keep prices from falling further.

This summer’s record prices for crude helped bring increased supplies to market — from both private oil companies and state-owned producers eager to cash in on the surge in price. By mid-November, oil inventories had swelled to 340 million barrels — well above their 5-year average highs, according to the Department of Energy.

“There was real concern here that going into 2007 you were basically running out of places to put the oil,” said John Kingston, who tracks the market as director of oil at Platts, a commodity news and information service.

As supplies were backing up, a slowdown in the global economy helped ease demand. Unusually warm winter weather cut consumption of heating oil and natural gas, sending prices of those commodities lower as well. So homeowners and landlords have gotten a substantial break on their heating bills so far this winter.

Gasoline pump prices have been slower to pull back — a gallon of regular sold for an average $2.33 last week, a few cents higher than early December. Part of the reason is that demand for gasoline remains strong — people still have to go to work, so warm weather doesn’t help cut gasoline consumption. Increased construction activity made possible by warm weather has also added to demand from builders. But pump prices have flattened in the past month, and analysts say they expect prices to ease in the coming weeks.

$20 oil in the next 4 to 8 years?

There a few oil analysts who believe oil prices could be headed for a much bigger fall —especially as heavy investment in new production during the recent price run-up begins to bring a big increase in supplies to market. Even at $50 a barrel, that investment in new production will remain strong, according to Peter Beutel, who follows the oil market as president of Cameron Hanover.

“We will find a lot more at these prices,” he said. "A proven barrel of oil is how much you can get at today’s price. I believe we have a lot more oil on this planet than people believe. And we are going to find it over the next few years."

Beutel thinks oil prices could fall as low as $20 a barrel in the next 4 to 8 years before beginning to rise again.

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