Goldman's Global Investment Research forecasts oil at $USD105

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Goldman sees oil spiking to $105
Says lower prices will only return when consumption is meaningfully reduced.
March 31, 2005: 4:15 PM EST
LONDON (Reuters) - Oil prices could touch $105 a barrel in the next few years, the influential
investment bank Goldman Sachs said Thursday.
The bank's analysts said in a research report that the world energy market is in the early stages of
a "super-spike" period that could see 1970s-style price surges. The bank called its forecast
"conservative."
The report sent crude oil  href="http://money.cnn.com/markets/commodities/"><http://money.cnn.com/markets/commodities/> soaring Thursday, with U.S.
light crude for May delivery adding $1.41 to close at $55.40 on the New York Mercantile Exchange.
U.S. oil futures on NYMEX have averaged $50.03 a barrel so far in 2005 after hitting record highs in
recent weeks.
But adjusted for inflation, oil would have to hit about $80 a barrel to top the levels seen during
the oil crisis of the late 1970s.
Goldman's Global Investment Research note also raised the bank's 2005 and 2006 New York Mercantile
Exchange crude price forecasts to $50 and $55 respectively, from $41 and $40.
"We believe oil markets may have entered the early stages of what we have referred to as a 'super
spike' period -- a multi-year trading band of oil prices high enough to meaningfully reduce energy
consumption and recreate a spare capacity cushion only after which will lower energy prices return,"
Goldman's analysts wrote.
Goldman is the biggest trader of energy derivatives, and its Goldman Sachs Commodities Index is a
widely-watched barometer of energy and commodities prices.
Goldman said its predictions were supported by thin spare capacity in the energy supply chain and
long response times for bringing on additional supply. The report also pointed to robust demand in
the United States and in developing heavyweights China and India, despite the recent rapid increase
in energy costs.
Back to the '70s
Goldman said the current oil market environment was much like that seen in the 1970s -- when oil
prices spiked dramatically following the Arab oil embargoes on supply to the West and Iran's
revolution.
High energy prices threw the world into recession, and triggered several years of declining oil
demand.
During 1980-1981, gasoline spending in the United States corresponded to an average 4.5 percent of
GDP, 7.2 percent of consumer expenditures, and 6.2 percent of personal disposable income, Goldman
said.
"Our new $50-$105 per (barrel) super spike range perhaps conservatively corresponds to gasoline
spending in the United States that reaches 3.6 percent of forecasted GDP, 5.3 percent of consumer
expenditures, and 5.0 percent of personal disposable income.
Goldman said that assuming gasoline spending needs to reach 1970s levels to destroy demand, its
upside super-spike estimate would be $135 per barrel for New York crude.
"Perhaps the ultimate answer to how high oil prices need to go before demand destruction occurs is
derived from knowing when American consumers will stop buying gas guzzling sport/utility vehicles
and instead seek fuel efficient alternatives," the analysts wrote.
"Based on our analysis of gasoline spending and the economy noted above, we estimate that U.S.
gasoline prices may need to exceed $4 per gallon," they said.
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