Henry Groppe has been tracking the ups and downs of oil through 60 years, 11 U.S. presidents and five full cycles in the commodity. So he knows what he's talking about when he says that this time, it's different.
"This is the most interesting time I've ever experienced," he said.
The 80-year-old Texan, who has been an independent consultant on oil and gas markets for longer than most of his competitors have been alive, believes we have seen more than just an overheated oil market over the past couple of years. Rather, he argues it's the beginning of a new era for oil -- one of sustained high prices, limited supplies and tough consumer choices.
"We think this is new territory," Mr. Groppe said in an interview this week in Toronto. "We call this new era 'The Era of Price Rationing.' We think that total world production is levelling out and will be declining, and prices are going to have to be high enough to restrain consumption to match a supply that's no longer growing."
What this means is that investors and consumers shouldn't read too much into the recent 17-per-cent drop in crude prices from their August peaks, a move he dismissed as a typical seasonal dip.
Mr. Groppe, who specializes in long-term analysis ("It's impossible to make short-term forecasts that have any meaning whatsoever"), predicts average prices for crude for the next 10 years will be $55 (U.S.) to $65. He said the chance of $20, $30 or even $40 oil for any sustained period is "very close to zero."
That's a hard pill to swallow, especially given that crude was less than $20 a barrel as recently as 2002. But Mr. Groppe is a proponent of the so-called peak oil theory -- a scientific model that projects that global oil production is near its peak, and is destined to decline.
He said the previous era, "The Era of OPEC Control," came to an end in 2004 when it became apparent production from the Organization of Petroleum Exporting Countries had peaked. The era before that, "The Era of U.S. Control," ended in 1970 when production in the United States, then world's dominant producer, reached its peak -- just as peak-oil theorists had predicted.
"That's what's in store for every field, every region, every country and ultimately the world."
Mr. Groppe acknowledged his view is not widely held. Indeed, the U.S. Department of Energy and the world's major oil firms believe total world supply will actually increase 50 per cent over the next 25 years, aided by technology that will not only lead to new discoveries but will reduce production costs, sending prices down into the $30 range.
But Mr. Groppe and the industry mainstream have been at odds before, most famously in 1980, when he made a prediction that solidified his reputation as a true oil guru. With oil topping $40 a barrel, and the DOE and oil companies warning of $75 or even $100 crude, he predicted that the high prices would alter consumption patterns and drive prices below $15 (U.S.) a barrel by 1985. He was right.
"We feel they are just as wrong this time," he said.
Unlike many peak-oil proponents, Mr. Groppe does not believe the topping-out of production inevitably leads to "the end of the economic world as we know it," as he put it. Rather, he believes other petroleum liquids stemming from natural-gas production, as well as synthetic fuels, will be stepped up to offset the decline of crude output over the next 10 years or so, and that sustained high prices will again change consumption patterns.
In the meantime, "major volatility is inherent from now on." Every little shift in supplies will send tremors through a market that, producing full-out, won't have flexibility to absorb short-term shocks.
For example, he allowed that a terrorist attack on Saudi Arabian oil facilities could trigger a spike above $100 a barrel, while a sharp economic slowdown brought on by, say, an avian flu pandemic, could send prices down toward $40 a barrel.
In the longer term, he said, the demand response will determine where oil trades. With global demand rising an average 2 per cent annually for decades, and with China and India set to generate hundreds of millions of new middle-class car owners, conservation will be difficult. But on this front, Mr. Groppe is refreshingly optimistic.
"The big response on the consumption side you're witnessing every day in Detroit," he said, noting SUV and truck sales have been plummeting while the sales outlook for hybrid cars "are really amazing." (He drives one himself.)
"We think most of the surprises are likely to come on the consumption side," he said. "It's a complex set of adjustments. We're going to have to restrain consumption in every different consuming part of the world. But ultimately, we'll change the manner in which we live and do things."