Predictions on where and when the oil and gasoline markets hit their peaks vary. But three local professors last week said the factors driving prices are likely here to stay.
They said the increase mostly comes from the basic concept of supply and demand, with petroleum sources struggling to keep pace with growing demand that is spurred by the Chinese and Indian economies.
The dwindling prospect of new discoveries and political instability on the supply side also lead to higher prices, they said.
“As the Chinese and Indian and Asian economies continue to do so well, which we hope they will, demand will just keep growing, which comes up against a supply constraint,” said David L. Lindauer, Wellesley College economics professor. “That’s when you see prices rise and I believe we’ll see prices like this for quite some time.”
The federal Energy Department said last week it expects the national average of regular gasoline to peak at $3.73 per gallon, sometime in June, and crude oil will average $110 per barrel this year. In its monthly report, the department says U.S. consumption in 2008 is actually expected to drop, but will rise globally by 1.2 billion barrels per day.
Other estimates hit their most dramatic point in a report by Goldman Sachs, the prominent investment bank, last week. It said a barrel of oil could rise as high as $200 in the next two years, though other private analysts argued against the figure.
Oil traded above $126 per barrel Friday for the first time. It averaged $72 per barrel last year, according to the Energy Department report.
Peter Cohan, a Babson College adjunct professor of management, said he calculated a gallon of gasoline would cost $6.67 if barrel prices hit $200. He said he expects gasoline prices will pass Department of Energy estimates.
“From what I’ve observed over the last seven or eight years, I don’t see any reason why it would stop going up,” said Cohan, also president of Peter S. Cohan & Associates, a venture capital and management consulting firm. “This prediction about things peaking in June seems improbable to me.”
Michael Quinn, Bentley College economics professor, said he agreed with the Energy Department’s estimate of $3.73 per gallon, with the large caveat of “if the politics and weather agree.” He also said speculation only has a minor role in driving prices.
“The allegations that it’s all speculation is, in my opinion, not true if you look at the hard numbers,” Quinn said. “When you have consumption numbers rising faster than supply, prices are going to rise. That’s a long-term issue we’re going to have to deal with.”
He also noted the search for petroleum has benefits as well as drawbacks. More suppliers diversifies risk, but the “quest to increase supply” has “led us into more and more unstable regions and countries.”
“While they’re stable, it will be fine, increasing supply and eventually decreasing prices, but there’s also risk in that new source,” Quinn said.
Lindauer also said Chinese and Indian demand for oil is not only on the industrial side; it also comes from a growing consumer market. He highlighted the $2,000 car Tata Motors Ltd. of India is producing will have many people who bike behind the driving wheel.
“These folks are getting richer and they want to do the things we do,” Lindauer said. “They want to drive cars and fly on airplanes and do things that consume oil.”
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