A recent Barron's article predicted that oil prices could top $150 next year and if this becomes true, it could wreak havoc in the global economy with a devastating impact.
The prediction cannot be ruled out given the government's inability to stop speculation and the spread of turmoil in the Middle East, coupled with concerns over potential supply disruptions and a weakening US dollar due to burgeoning budget deficit.
We expect crude oil prices to remain inflated because of concerns about potential supply disruptions as a result of the political turmoil in the Middle East, a sinking US dollar on a growing budget deficit, and excessive financial speculation, Oppenheimer analyst Fadel Gheit wrote in a note to clients.
Though supply and demand fundamentals support crude oil prices of about $90 for Brent crude and $80 for West Texas Intermediate (WTI) crude, Gheit expects this price differential to narrow considerably once the new storage capacity at Cushing, Oklahoma, and pipeline capacity from the US Mid-Continent to the Gulf Coast is built in the next two years.
In 2008, the surge in crude oil prices led to a record $148 a barrel, despite adequate supply and high inventories. The price bubble, though justified on grounds of high oil demand and strong global economic growth, was believed to have been caused by excessive speculation.
The next oil price bubble most likely will be driven not by strong demand, but by fears of potential supply disruptions caused by the turmoil in the Middle East, which will be fully exploited by financial speculators, Gheit said.
A $150 a barrel crude oil price would push US gasoline prices to record levels above $5 per gallon, which would shock the consumer, sink confidence, reduce spending, increase inflation, and depress the economy further.
High gasoline prices, especially in a weak economy and with high unemployment, could even impact the US presidential election, most likely hurting the incumbent Obama, while helping his challenger.
Another oil price shock could be a wake-up call and the catalyst needed for a bipartisan national energy policy with significant implications for the country's economic growth outlook and foreign policy.
We believe an effective national energy policy must boost domestic production, reduce oil imports, increase investments in renewable energy sources and clean coal technology, energy infrastructure and energy conservation, Gheit noted.
Winners and Losers
Naturally, the biggest winners from a surging oil price environment would be energy producers and companies servicing them.
The oil price broom would hit various industries including transportation, chemicals, agriculture and food production and that in turn should negatively impact consumer confidence and spending, cause inflation, increase unemployment and sink the economy.
On the companies perspective, the biggest gainers would be companies with high oil focus, especially in North America, where unit profits are the highest in the world at oil prices above $80 a barrel.
Gheit said companies such as Whiting Petroleum Corp. (NYSE:WLL), Hess Corp. (NYSE:HES), Murphy Oil Corp. (NYSE:MUR), Marathon Oil Corp. (NYSE:MRO), Occidental Petroleum Corp. (NYSE:OXY), Chevron Corp. (NYSE:CVX), BP plc (NYSE:BP) and Apache Corp (NYSE:APA) would benefit the oil price bubble.
The analyst added that oil service stocks and domestic natural gas producers should also gain in the hope of higher natural gas prices and increased focus on growing liquids production in their portfolios.
Currently, brent crude futures were trading at $112.13 and WTI crude futures were trading at $96.14.