Michael Giberson
At Platt’s The Barrel blog, Dave Ernsberger writes that, “no one particularly loves an economist, especially the ones that work at Wall Street banks.” But then he recalls that, about three years ago when oil prices were about $55/barrel, Goldman Sachs economist Arjun N. Murti briefly became famous in energy and finance circles (or notorious, depending on your perspective) for forecasting that the price of oil would reach $105/barrel.
When the report came out [in late March, 2005], the oil market rallied by more than a dollar as word of his forecast reached the floor of the NYMEX. A day later, crude hit a new record high of $58 per barrel — small change compared to Friday’s settlement of $110.21.
Murti, who was at the time described by Fortune magazine as “press-shy by nature,” became a strange sort of celebrity — largely because commentators thought he was a crank. He became a lightning rod for angry investors, and energy regulators around the world who thought they had found a smoking gun to support the theory that hedge funds and banks were somehow tied up in a conspiracy to drive up prices.
Some accused Goldman Sachs of manipulating the market through the report to benefit its energy-trading desk.
There were calls from some commentators for a government investigation. Hank Paulson — then CEO at Goldman Sachs and now the US Treasury Secretary — himself stood up to defend Murthi at an annual shareholders’ meeting.
So imagine the satisfaction if you are Murthi now.
Rather, imagine the satisfaction if you – as a CEO – listened to Murthi then, and re-positioned your portfolio, hedged your company against the prospects of rising prices, and otherwise took steps to be prepared for the march of oil prices over these last few years. Now that would be a reason to love your economist – or at least to listen to your economist with a little more respect.
Of course, Murthi’s forecast was disputed back then, no doubt by exactly opposite reactions from other economists. A Business Week special report published a month after Murthi’s $105 forecast collected economists’ opinions about the likelihood of $100+ oil and the probable effects of such high prices, some of which forecasts can – with the benefit of hindsight – be fairly called as off the mark.
If crude costs $100 or more a barrel, gas prices will hit at least $4 a gallon. And prices at the mall will have shot up long before oil reaches the $100 mark, says Mark Zandi, chief economist at Economy.com.
Why? After all, even at today’s price of roughly $50, oil costs twice as much as it did two years ago, yet consumer prices have risen a mere 5% since then. The reason is that productivity gains and cost savings from technology investments in the late 1990s have allowed manufacturers to better absorb the impact of more expensive oil. And some producers have chosen not to pass along increased costs to avoid losing market share.
But manufacturers and retailers can contain costs only for so long. By now, most factories are so lean they haven’t any room for further cost cuts or productivity gains. “They have squeezed all the juice out of productivity efficiencies in the past few years,” notes Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Dallas.
Crude oil prices are above $100/barrel, yet gasoline prices currently average $3.27 nationwide, so apparently there was a little more efficiency juice to be squeezed out over the three years since the article was published. (See more data on gasoline prices at the Energy Information Administration.)
A related article on “winners and losers” in the Business Week special report predicted that Starbucks could be among the losers if crude oil prices rose above $100:
As energy gets costlier, those little extravagances in life like, say, a three-buck-a-cup flavored coffee drink could slowly get crowded out. “I think people who drive would stop getting their Starbucks everyday,” Cohan says. “They’d probably make their coffee at home.”
At least in my case, I did make coffee at home this morning. Then later, this afternoon, I drove more than ten miles to get to the Grape + Bean in Old Town Alexandria (Virginia), to pay nearly $2 per 6 oz. cup for coffee, because they have one of these machines. I drove past several Starbucks on the way, so maybe it is bad news for the company.
But I won’t be able to make a regular habit of paying so much for coffee (over $42/gallon!), if gasoline prices continue to be high. Unless, of course, the market starts showing a little more love for energy economists.