By Bob Miodonski
of Contractor's Staff
WASHINGTON — The prices of oil and metals likely will remain high for the foreseeable future, although the long-term outlook for metals is better than for oil, said Martin Regalia, vice president and chief economist for the U.S. Chamber of Commerce. He made his remarks April 17 here at "Building Global Energy-Efficient Solutions," the fourth in the EnVisioneering Symposium Series sponsored by HVACR manufacturer Danfoss.
Regalia painted interesting pictures that illustrate the laws of supply and demand in which the primary figures work outside the United States. OPEC, for example, is manipulating the supply of oil to maintain a price level that enriches oil-producing nations while discouraging investment in alternative fuels. Developing economies, such as in China and India, are creating such a demand for metals that supply is having a tough time keeping up.
Supply is not a problem, at least for now, with oil, Regalia said. If OPEC members were to completely loosen all restrictions and produce whatever they could, the price of oil would drop sharply because the amount supplied would far exceed the amount of demand, he said.
"If, on the other hand, they continue with the current cuts and the current production schedules, they are attempting to pick the price of oil, somewhere around $55 to $65 a barrel," Regalia said. "And that's not an amount that I think they picked cavalierly."
With oil priced at $60 to $65 a barrel, energy alternatives start to look good economically, he said. If investors were convinced that oil prices would stay at that level, they would put money in developing alternative energy sources.
"Anything below that, and while we have the technology, it isn't economically feasible," Regalia said. "And so the people that control those technologies are not going to make a significant investment to see the Arabs turn on the spigot and essentially undercut their investment for some period of time — two, three, four years even.
"So with that type of control in the market, my guess is that you're not going to see oil prices much below about $55, and you're not going to see them for any prolonged period much above $65, $66, $67."
Other disasters such as Hurricane Katrina could result in severe supply disruptions, he said. Those could cause the price of oil to spike to even higher levels.
"But you'll also see them turn on the spigot to adjust the supply and demand, keep that market focused in that range where they have enough uncertainty to keep long-term investors from sinking a lot of dollars on the debt that they're going to pay off down the road," Regalia said.
The situation is quite different for industrial metals where demand has has been exceeding supply for the last couple years, Regalia said. In large part, this has been caused by all the activity in emerging markets, particularly in China — not just because China is growing but because it is emphasizing industrial production.
"We have seen an enormous up tick in metals prices over the last couple years," he said. "I think it was about a 57% increase last year in a broad-based index of industrial metals. Each one behaves a little bit differently."
Elevated prices should continue for the next several years based on robust projections for growth in China and other industrializing nations, Regalia said. Demand for metals will remain high.
"Now, when you look beyond the short-mid-term and you get out into an economy maybe a decade or more down the road, then you will start to see demand in the Chinese economy and other new growth economies shifting and becoming less targeted towards industrial production and exports and more towards consumer goods and consumption," he said. "When that happens, then their demand for these type of metals will be reduced to a certain extent. And over time, it appears that these prices should trend down."
Other factors that drive up the price of metals are extraction and production costs. Further exploration, however, should result in more availability, which should lower prices eventually.
"But it's going to be out there almost beyond where it makes any difference to anyone in their current business decision-making," Regalia said. "I mean if you're making decisions at this point on what's going to happen 10 or 12 years out instead of how to still be around in 10 or 12 years, then I would suggest your priorities may need some adjusting."