Who knows why the $50 oil assumption was made. Maybe they actually believe it. Maybe they think it will be higher but wanted to be conservative (and keep their jobs).
The Energy Information agency is using $40 oil in their “Annual Energy Outlook 2006 – Overview” published in February (http://www.eia.doe.gov/oiaf/aeo/pdf/overview.pdf).
“… world crude oil prices, which are now expressed in terms of the average price of imported low-sulfur crude oil to U.S. refiners, are projected to increase from $40.49 per barrel (2004 dollars) in 2004 to $54.08 per barrel in 2025 (about $21 per barrel higher than the projected 2025 price in AEO2005) and to $56.97 per barrel in 2030.”
Since the UCLA guys are basing their $50 oil assumption on the fact that NG dropped in price, let’s compare the oil market ($wtic) and NG ($natgas) (both symbols are for http://www.stockcharts.com which is a good free charting site). I’m looking at the weekly timeframe so I can see what happened in 2005.
Check out the parabolic spike that NG ($natgas) had in July – October. That is a classic example of a parabolic blowoff and the aftermath.
The oil chart ($wtic) is very tame by comparison. Just a steady climb higher with periodic pauses to rebalance sentiment.
So, from a strictly technical analysis of the charts, it is not reasonable to expect oil to behave the same way that NG did.
And since we are talking about parabolic spikes and their aftermath, I suggest that everyone look at the chart in Rich’s article today (link at top-right of this page). Looks like a parabolic spike to me! Can you say, “OUCH!” How about, “revert to the mean?”
Forecasting a recession is a toughie. It’s easy to be a bear but the timing is difficult. I think the willingness of the American consumer to continue living on debt is the biggest variable in any forecast today. When the American consumer chooses or is forced to stop living on credit our economy is going to be hurt. I’ve been expecting this to happen since 2002 when I started selling my property. It amazes me that the game has continued this long. Will $70 oil cause the consumer to wake up? Who knows.