How Low Can Oil Go?

I see CNBC is giving a soapbox to anyone who’s willing to trot out a crackpot theory. Oil economist Philip Verleger was on CNBC this morning saying that oil was going to $15.

With all due respect to Mr. Verleger, I believe he’s going to be really, really, wrong. I mean, the basic fact that if you lower the price of something, people will buy more of it. And look at the price of gasoline …

Already, sales of the large-sized SUVs and trucks are picking up again. We know how this story plays out, folks. People drive bigger vehicles and drive more, increasing demand. There is limited refinery capacity in this country, and it's already close to maxxed out. The price of gasoline goes up. That should be simple enough for an economist to grasp.

The good news (from my perspective) is that lower gas prices will really juice up the economy. I’m the odd man out at Weiss in that I do not think we’re heading pell-mell for a severe recession. That may happen some day … I just don't believe it’s not likely in the next 12 months. Why?

• The economy is growing. And lower gas prices will help it grow faster.
• The bursting of the housing bubble is squeezing the middle class. But I expect that to take a long time to play out (people will do nearly anything to keep a roof over their heads) and commercial construction is actually RISING around the country – that should keep commodity demand percolating.
• As I reported September 7, when I told you about my $60 target for crude oil, commodity demand from China should increase. India, too. The lower gas prices are, the more people in those countries will drive. And that will light a fire under demand.

Let’s revisit a chart of oil ...

My target is still $60. I think oil could rally there. Below that, $57.70 lends support, and if we have a panicked rush out of oil, it could go as low as $50. But I think that kind of pullback unlikely, and even if it happens, I don’t think that it would last long. Not with the IMF raising its target for global growth in 2006 to 5.1%. The IMF also predicts that the global economy will grow 4.9% in 2007. Could they be wrong? Sure. But there are plenty of reasons why they should be right – China, India and Russia being three of them.

Anyway, if CNBC’s standard for putting you on the air is that you have to say something whacked, believe me, I can jibber-jabber with the best of them. Put me in coach – I can talk crazy, too!

Check out my new gold and energy blog at MoneyAndMarkets.com