Gazprom CEO's $250 Oil Forecast Is Doom Traders Love By Michael Janofsky Enlarge Image/Details June 16 (Bloomberg) -- At $250 a barrel for crude oil, food prices double. The U.S., Japan and Europe plunge into deep recession. Companies go bankrupt. Airlines are nationalized. Sport-utility vehicle sales dry up as gasoline tops $7 a gallon. The scenario may not be unimaginable. Alexei Miller, chief executive officer of OAO Gazprom, the world's biggest natural- gas company, said June 10 that crude will climb to $250 a barrel in the ``foreseeable future.'' Prices may reach that level only after a war or attack on major oil installations, says Jeff Spittel, an analyst at Natixis Bleichroeder Inc. in New York. While executives, elected leaders and economists disagree on the probability of Miller's vision, there is consensus that the price would jolt everyday life. ``It would be a disaster for all the oil-importing countries, all the democracies and China,'' says James Woolsey, vice president of consultant Booz Allen & Hamilton Inc. in McLean, Virginia, and a former Central Intelligence Agency director. ``And it would be hugely beneficial for the many monarchies and dictatorships that are the main suppliers.'' Some investors are already betting on Miller's forecast. At least 3,008 options contracts have been purchased giving holders the right to buy oil at $250 a barrel in December, data compiled by Bloomberg show. The options closed at 64 cents on June 13. Rising oil costs have been responsible for a third of global food inflation since 2004, according to London-based research firm New Energy Finance. ``At $7-a-gallon gasoline, you're probably looking at food prices almost double,'' says Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. `Massive Shutdown' Crude oil prices reached a record $139.89 a barrel today, more than double what they were a year earlier. Goldman Sachs Group Inc. and Morgan Stanley forecast the cost may reach $150 in the next few months. At $250, ``there would be a massive shutdown of companies,'' says Carlos Mattei, procurement vice president for glassmaker Vitro SAB in Monterrey, Mexico. ``Many of these small companies have to choose between paying the gas bill or payroll.'' Still, slowing demand may curb prices. The International Energy Agency, an adviser to 27 oil-consuming nations, last week cut its forecast of world oil use for a fifth month as record costs dented consumption. The U.S. Energy Information Administration expects prices will drop to $120 by December 2009. ``Over a decade or more, after you adjust for inflation, if the price doubled, we would expect demand to fall by 30 percent,'' says Douglas MacIntyre, the agency's senior oil market analyst. U.S. oil consumption fell 5.7 percent from 1973 to 1975 as the Arab oil embargo led to import shortages. `Incredibly Vested Interests' Tom Kloza, chief oil analyst for the Oil Price Information Service in Wall, New Jersey, is skeptical about Miller's prediction because it may benefit Gazprom. ``It's silly to take people with incredibly vested interests as having an unfettered, unbiased opinion,'' Kloza says. Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, says the firm's economic models break down if the price of oil goes over $200 a barrel. ``The U.S. goes into deep recession, as does most of Europe and Japan, and that takes much of the developing economies with it,'' he says. ``I don't see how we get to $250 because the economy is broken long before that, and demand falls and that causes prices to fall.'' Oil at $250 would slash the growth of U.S. gross domestic product by about 2.5 percentage points, says Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. Nationalized Airlines The U.S. may be forced to nationalize airlines if oil keeps rising, Barry Sternlicht, founder and CEO of Starwood Capital Group LLC, told a hotel conference June 2 in New York. Carriers won't be able to raise fares enough to cover costs, requiring government subsidies to make tickets affordable. ``I'm not sure the model that the airlines are in right now is going to work unless the U.S. does what many other countries have done,'' Sternlicht says. US Airways Group Inc. would need an average fare of about $1,000 per round trip to break even with oil at $250, President Scott Kirby says. That's more than triple the current average of $300. Fuel accounted for 31 percent of US Airways' 2007 operating expenses. Automakers would be devastated, says Daniel Coker, CEO of Northville, Michigan-based Amerigon Inc., a supplier of parts that heat and cool car seats. ``Well, $250 per barrel would cripple the auto industry,'' he says. Transportation Reduced Households will cut back on transportation, says John Wolkonowicz, an analyst at Global Insight. ``You certainly won't see mom hauling around the kids in a Chevy Suburban,'' he says. Imports of smaller cars accounted for 23 percent of U.S. auto sales in 1980, up from 15 percent in 1972, according to Ward's Automotive Reports, which tracks vehicle sales. At $250 a barrel, even energy-producing states would cut services, New Mexico Governor Bill Richardson said in an e-mail. ``It's not clear that the additional revenue would enable us to meet the inflationary impacts that this would impose on road construction, school lunches and even public safety,'' he said.
let's see $250 oil. it will end our dependence on crude oil and foreign energy in 250 days. i drive just a little bit slower but have realized about a 25%+ improvement in fuel economy... i never would have realized how efficiently i could drive until gas hit $4/gal. if gasoline hit $10/gal watch how fast business and corporate industry get pissed off at the energy cartel. Exxon is selling off their retail/marketing business. They know this. That is why it is in their best interest to see $25 barrel before $250.
$250/barrel oil will cause a global depression. What's all this BS about a 'deep recession?' And gee, a guy whose company that stands to benefit the most (taking his company to a one trillion USD market cap), making such a prognostication, should be deemed an unbiased commentator, let alone an expert, and be given the greatest respect and deference in his crazy-ass comments.
I've never been a seller of options, but at 64 cents for dec $250 crude, that sounds like a pretty tempting trade.
I think they said the same about $120 oil a while back. Seems like we survived. I think we should start looking into Oil Shale and stop with the bullshit in D.C. preventing us to do so. I also think we should start building refineries on the coasts. It would take a few years to get both online, but the faster the better. The reps. and sens. really need to finally get their head out of their asses and get something done. This, how hard it seems, is what is needed. We need to end our foreign dependence on this crap. We should had followed Brazil in 76. But, no, this was not possible because of the damn farmers. What about now? Is it possible now?? Dumb asses.
At $10/gal food prices would not double. Rather, there simply would not be any food at the market at all because truck drivers that depend on diesel would strike and not deliver the goods. Small companies may have to shut down but large companies usually have short and long term energy contracts that hedge the cost of their inputs..