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Daily Telegraph: Sooner or later Forbes will be proved right: Forbes predicts oil will drop to $35 within a year: It takes decades to develop an oilfield and win the bulk of its contents, with most of the spending up front, which is why Shell, for example, assumes a price of $25 when trying to decide whether a prospect is worth pursuing.: Wednesday 31 August 2005

 

City comment

Edited by Neil Collins

(Filed: 31/08/2005)

 

Steve Forbes chose a fine day to make his prediction for oil prices. As a barrel hit $68 in London, he forecast that it would drop to between $35 and $40.

 

Rather rashly, he also specified that we'd reach this agreeable range within a year, although he is surely right to argue that the law of supply and demand has not been suspended for just one commodity, albeit such a vital one.

 

In truth, forecasting the price of crude is a mug's game, since even the big oil companies, which can throw almost limitless resources at the problem, effectively admit that they haven't a clue.

 

It takes decades to develop an oilfield and win the bulk of its contents, with most of the spending up front, which is why Shell, for example, assumes a price of $25 when trying to decide whether a prospect is worth pursuing. There's a respectable argument that this price is too low, given the way demand from China and India seems certain to grow dramatically, but in practice it makes little difference short term.

 

There are not vast reserves just waiting to be exploited if the test price was raised to $30, and even if there were, all the world's oil rigs and geologists are already working.

 

Yet however desperate we are for the stuff today, the law of supply and demand will apply. We're unlikely to cancel the holiday for the sake of another 5p on a litre of four-star, but we will buy more frugal cars, and big users of energy will find ways of saving it.

 

When the price falls, we won't trade in the diesel for the gas-guzzler or tear out the loft insulation. Next year, or sometime, Mr Forbes' prediction is likely to come true.

 

neil.collins@telegraph.co.uk 

 

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