NEW YORK (TheStreet) -- I was speaking to Joe Deaux today about the Barron's cover story predicting oil prices would see $75 in the next five years. My view couldn't be more different.
Barron's used two correct facts to make its case for falling oil prices: First, it recognized the massive growth in North American oil production from Canadian oil sands, U.S. fracking of oil from shale and deep water production from the Gulf of Mexico. Second, they predict, I think correctly, a transition to more use of natural gas and renewables, displacing oil demand. Both of these factors, they contend, will lead to a collapsing of world oil prices in the next five years.
But while Barron's is, I believe, right on these two energy trends, they are wrong on how they will likely impact price.
While Barron's is right that there has been an explosion in new production of oil here in North America, what the authors of the cover story seem to forget is that it was specifically higher trending prices that allowed those technologies to develop. As the amount of oil from traditional wells decreases, the percentage of supply coming from unconventional shale plays and deep water must increase.
But these barrels are expensive to produce, sometimes 10 to 15 times more expensive. There are several sources of unconventional oil that are uneconomic to be developed unless oil remains above $100 a barrel and some that need even $120 or more. If prices drop much below that threshold, oil companies will simply refuse to produce them.
Secondly, while growth in natural gas and renewables are an inarguable trend in the developed world, the growth profile of oil demand is not going to come from the developed world in the next decade. Virtually every forecast from every major oil company predicts marginal growth will emerge from the Middle East and Africa, even while it erodes somewhat elsewhere.
So while demand for oil will slacken somewhat here in the United States and in Europe, that demand will be more than made up for by nations just beginning their industrial life cycle in the undeveloped world.
I believe Barron's has taken two correct trends to come to a wrong conclusion and I do not see oil reversing its upwards trend any time soon. I talk more about this with Joe in the video above.