From the July 2008 issue of Investment Advisor • Subscribe!

The Return of $20 Oil?

On the same day in June that oil reached a new high of $139 a barrel, I had a conversation with Ben Warwick, CIO of Denver-based Quantitative Equity Strategies and author of IA's monthly Searching for Alpha electronic newsletter, in which he calmly predicted the return of oil prices to around $20 a barrel.

Warwick points out that we've had at least one energy crisis in every decade since the 1970s, and they've all started with a disruption in supply relative to demand, which causes prices to spike. Then consumption patterns change, production increases, technology offers solutions, or a combination of the above leads to a new stabilization.

While acknowledging that prices are higher than ever, Warwick doesn't think the current prices are sustainable, never mind the predictions of $200 and $300 a barrel.

"I don't think they're sustainable for the same reason that they weren't sustainable for the other crises that we've seen," he observes. He predicts that further developments in solar and wind power, combined with cultural change--"the whole green movement and global warming"--will change consumption patterns and lessen demand.

"I think you'll see the energy companies investing in infrastructure to reach that harder-to-get-to oil. We've already gotten the easy-to-get-to oil. In three to five years, once we get that done, there's going to be oil everywhere and nobody's going to be using it. That's why I see oil going back dramatically lower, about $20 a barrel. You think that's funny, but in January 1999, oil went to $8 a barrel. Can it go back to $20? Absolutely."

He continues, "All I'm saying is that capitalism is a self-correcting sort of process. When the price of a good gets out of whack, then there are other economic forces that move in to correct it. I'm trying to insert a little pragmatism into this whole energy argument."

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