Don't say Henry Groppe didn't tell you so.
Almost a year ago, when oil prices were humming along at close to $100 (U.S.) a barrel, the 82-year-old dean of oil analysts warned his clients that the price was destined for $60 before the end of the year. When it soared above $145 this summer, he stuck to his guns.
This week, oil fell below $60 a barrel.
It's that kind of prescience that gets guys labelled "guru" - a tag Mr. Groppe long ago earned in his almost six decades predicting the oil market. The soft-spoken Texan cemented his forecasting in the early 1980s, when he foresaw the collapse of oil prices from then-record levels of $40 a barrel.
"Essentially, all forecasting, no matter what's being forecast, is a straight-line extrapolation of what has been experienced very recently," he said in an interview in Toronto yesterday.
"All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always this contrast with the consensus."
Despite his two big (and correct) calls of market downturns, Mr. Groppe is hardly an oil bear. In fact, he hasn't changed his tune much from when we last talked with him two years ago - a time when, ironically, many people felt he was being overly alarmist when he talked about prices being sustainable above $60.
His view is based on a fundamental belief that global oil production has peaked, and is destined to go into a slow but steady decline. At the same time, though, he also believes those higher prices will result in demand destruction as consumers shift to alternative fuels - thus keeping a lid on prices, albeit at higher levels.
"We're in a new era … in which oil production will be irreversibly declining," he said. "The question then is, what price trend during that period will give you the matching demand destruction?"
"Our conclusion is that, on an average annual basis, [under]normal conditions, it's something that rises slowly from about $65-$70 to about $100. We think that will provide the necessary reduction in consumption."
He said such a change in consumption is already happening, and not just because of a global economic slowdown. (The Organization for Economic Co-operation and Development yesterday slashed its 2008 and 2009 global demand estimates, citing declining estimates for world economic growth.) Power generators and major industrial consumers have already been switching away from oil and toward cheaper coal and natural gas, and many are in the process of retooling their equipment to lower consumption and shift to cheaper fuels.
While he's skeptical that worldwide vehicular consumption can be significantly reduced over the next 10 years through the use of alternative fuels, he believes fuel substitutions already happening among industrial users will be sufficient to offset the declining global oil production and keep average annual prices in that $70-$100 range.
"That's all been set in motion," he said, noting that even China - which many forecasters point to as a major driver for continued long-term growth in oil demand - is changing its ways.
"In China, they're rapidly substituting - coal particularly." Thanks to substitution, he said, "China can continue to grow vehicle population and gasoline/diesel consumption for many years without any increase in total oil consumption."
Mr. Groppe blames the short-lived record surge in oil prices earlier this year on Saudi Arabia and the OECD's International Energy Agency. He said the Saudis, believing what proved to be an incorrect IEA forecast of a coming surge in non-OPEC oil production, cut its output in late 2006 and early 2007, a move that eventually led to a shortage of supply.
Now, he fears the Saudis may be making the same mistake again - cutting production amid forecasts of a recession-driven slump in demand.
He's forecasting that prices will rebound to average $83-$84 a barrel in 2009, as the current cheaper prices rejuvenate demand while the reduced Saudi production constrains supplies.
And what about oil stocks?
While some analysts point to the sharp decline in the forward strip in oil futures as evidence that oil stock price targets need to be slashed, Mr. Groppe thinks that's looking in the wrong direction.
"The strip has been the poorest forecaster of oil prices of anything that anybody has ever thought of using, yet that's what everybody has been using," he said. As long as people are driving prices lower based on these forward-strip commodity price assumptions, "It presents the investment opportunity of a lifetime."