Goldman Sachs sees economic recovery pushing oil to $85 in 2009

Oh no, not this again. Less than a year after a leverage-fed record high $147-a-barrel price helped plunge the U.S. economy into a recession, and despite high inventories, a leading investment bank said it expects oil prices to be "off to the races again" soon.

Goldman Sachs (GS) now says oil may reach $85 per barrel by year's end, $90 by this time next year, and forecast a price of $95 by the end of 2010, Bloomberg News reported Thursday.

Oil rose $1.55 to $67.67 per barrel Thursday on the news. The other major energy commodities also popped higher. Wholesale heating oil rose 4 cents to $1.77 per gallon, wholesale unleaded gasoline added 4 cents to $1.94 per gallon, and natural gas gained 3 cents to $3.79 per million BTUs.

Goldman counts on rising demand, OPEC being OPEC

Goldman said it expects oil demand to increase as the U.S. and global economies recover.

"As the financial crisis eases, an energy shortage lies ahead," Goldman analysts Jeffrey Currie in London and David Greely in New York wrote in a research report, Bloomberg News reported. Goldman's is basing its projections on the expectation that the economy will, indeed, stabilize soon and that OPEC will maintain it 2008-2009 production cuts, decreasing inventories and leading to a steady rise in prices.

At about $68, oil has roughly doubled since hitting lows near $35 per barrel in late December 2008. If oil's price continues to rise, it will take a toll on U.S. GDP and that of many other oil-consuming nations. In the United States, a rise in oil's price acts as a de facto tax increase on businesses and consumers. Each $1 per barrel increase in oil decreases GDP by $100 billion per year, and every one cent rise in gasoline reduces U.S. consumer disposable income by $600 million a year.

Clearly, some of those effects are already being felt: In 2009, average gas prices have soared about 56 percent from $1.60 to about $2.50 per gallon for unleaded regular, according to gasbuddy.com. Historically, as the price of gasoline rises, modest-to-middle income consumers cut back discretionary purchases to pay for gas, which, after all, is essential for transportation.

Economic Analysis: In essence, Goldman Sachs is predicting that OPEC will not reverse production cuts in the face of a rising oil demand, leading to a short-term oil supply squeeze, boosting prices to well over $80 during the next two years. Here's hoping Goldman is wrong. (For what it's worth, OPEC does not see oil prices rising to that level, instead forecasting a $70-75 range by the end of 2009.) However, if Goldman is correct, it could throw a serious monkey wrench into the developed world's recovery timetable. An $85 oil price would constrain growth in a healthy economy -- and in a weak one could create a double-dip recession, where GDP starts to fall again. The one saving grace is that oil's current $67 price seems to be out of whack with high inventories. Alternative asset seekers, speculators, and a weakening dollar all have helped boost oil's price, and many traders say those factors will not be enough to keep oil at its preset level, let alone rise to Goldman's forecast, amid a continued tepid U.S. economy. Lots of factors at play, in other words. Stay tuned.

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