Another $300 Oil Prediction -- and Why This One Matters

Last Updated Feb 14, 2011 8:09 PM EST

For years, prominent analyst Charles Maxwell has predicted that a peak in oil production will eventually push prices to $300 a barrel. But his latest forecast -- outlined in an interview with Barron's -- offers something more than the same, old skyrocketing crude prices story. This time he elaborates on what it'll mean for the average citizen; what will replace oil and boldly predicts that $300 oil won't send our economy into a tailspin, like it did last time.

Nuts and bolts on price and production

By 2020, a barrel of crude will be about $300, or about $225 a barrel in today's dollars, Maxwell told Barron's. (At the moment, crude prices are hovering around $85 a barrel.) A plateau in oil production will start in the next five years and by 2020, he predicts, output will recede slowly. Interestingly, Maxwell has adjusted the time frame on his $300 forecast since his September 2008 interview with Barron's. Back then, he said oil would hit $300 by 2015 because supplies would be so scarce.

To be clear, Maxwell isn't alone in his predictions. T. Boone Pickens, the Texas billionaire investor turned natural gas champion, threw out similar figures in 2008 when oil surpassed the $140 per barrel level.

Our saving grace

Maxwell sees natural gas as not only an answer to the looming oil supply problems, but goes so far as to describe it as a saving grace. He's not exactly alone here. Pickens is a huge proponent of natural gas, as is Big Oil itself. All the major oil companies hold substantial gas assets and, like Exxon (XOM), have beefed up investment in the sector.

Maxwell makes a more important point about alternatives, and one Congress -- especially the GOP -- would be smart to pay attention to. In short, there is no perfect replacement for oil. Solar, wind, hydropower, biofuels and geothermal are important in the short term, but can't be increased enough to fill the void. Instead, Maxwell pushes energy efficiency as a hugely important piece to solving our energy dilemma. Meanwhile, the House Appropriations Committee has announced spending cuts to be included in a measure to keep the government running beyond March 4. Energy efficiency and renewable energy funding was slashed by $899 million.

No bust with $300 oil?
Maxwell brazenly predicts the economy won't be brought down by $300 oil because prices will rise more gradually than they did in 2008. That would be nice. History, however, suggests otherwise.

The speed at which the price of oil rises is really only part of the issue here. Plain and simply, the economy -- and its health -- is linked to oil. Once our oil consumption exceeds 4 percent of GDP, we go into recession, a point analyst Steven Kopits, a well-known energy-business consultant, is fond of repeating.

As Kopits has noted in the past, the U.S. has experienced six recessions since 1972. At least five of these were associated with oil prices and in every case, when oil consumption in the U.S. reached the 4 percent of GDP tipping point, the country went into recession.

Photo from Flickr user David Reber's Hammer Photography, CC 2.0