Oil prices may go down in 2008

Larger supplies, more energy alternatives, and a slowing economy could be factors.

By Ron Scherer | Staff writer of The Christian Science Monitor

from the December 26, 2007 edition

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New York - Many energy experts are predicting that the price of oil will fall in 2008 from its current level of about $93 a barrel.

Behind the predictions: a slowing US economy and stronger production from both OPEC and non-OPEC sources. In addition, tensions with Iran seem to have eased somewhat, and the supply of oil from northern Iraq appears to be better. Increased production of ethanol and biodiesel will also help.

"Next year, we will probably be in a range of $80 to $85 a barrel," says Rick Mueller, an analyst with Energy Security Analysis of Wakefield, Mass. "And if the US goes into a recession, the price forecast will be lower."

If the price does stay in the $80 to $85 range, it will still be higher than the average price for 2007, which was closer to $71 a barrel.

The prospect of oil remaining under $100 a barrel could help the economy, says Bob Gay, managing partner of Fenwick Advisers, based in Rye, N.Y. "It takes a little pressure off the consumer," he says. "Beyond $100 a barrel is a delicate spot."

Indeed, lower oil prices could help ease cost pressures, since most measures of inflation have been pumped up recently by the rising price of food and energy. The increases have troubled the Federal Reserve, which is trying to balance the need for the economy to grow with the need to keep inflation in check.

Although there is optimism that oil prices will fall, energy analysts caution that a colder-than-normal winter could change the dynamics. "The most recent forecast is for the weather to be cooler into early January but later in the month to be warmer than normal," says Mr. Mueller.

Higher energy costs are eating into consumers' pocketbooks. The Energy Information Administration (EIA) estimates that the average household's winter heating bills will be about $2,000 – some $500 higher than last winter. Also, consumers this year paid an average of $2.83 per gallon for gasoline, according to EIA.

"Energy costs are probably shaving a quarter of a percentage point off gross domestic product as consumers have to spend more on energy," says Mark Vitner, senior economist at Wachovia Economics Group in Charlotte, N.C.

Even if the winter is somewhat colder, the energy markets may have a greater supply of oil next year. Through much of this year, OPEC production has been about 1 million barrels per day lower than expected, says John Felmy, chief economist at the American Petroleum Institute, a trade group in Washington. But he adds, "I have heard that Saudi Arabia is now pumping an extra 400,000 barrels of oil per day, so we'll have to see if that continues."

In fact, supply could outstrip demand next year, says Kevin Lindemer, an energy analyst at Global Insight in Lexington, Mass. This year, oil production was about 85 million barrels per day, barely enough to satisfy demand of about 85.7 million barrels per day. "Next year, we're probably closer to supplies of 87 million or 88 million barrels per day," he estimates.

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