Cyclical theorists vs. oil bulls

The bank's report highlights the growing schism in the oil analysis community between "cyclical theorists" - - such as Saudi Arabia's Sheik Yamani, among others, who argue that today's high oil price, as in previous high energy price eras, is setting the stage for a return to lower oil prices, as production builds and demand wanes; and "oil bulls" - - such as T. Boone Pickens, Jim Rogers, and several investment banks, among others, who argue that high oil prices are here to stay.

Independent energy trader Jim Dietz told Bloggingstocks Wednesday he can see oil's price moderating in 2008, but not longer-term.

"Oil trending lower, out into 2010? Yeah, that'll be the day," Dietz said. "From a technical standpoint, you can make a strong case that we had a strong bull run over the last 3 years because oil's up about 100%. That would suggest a healthy correction is probable down to $85 or even $80. So the World Bank's $75 is certainly possible, as it's near the healthy correction zone. But below that there's less technical evidence to argue that the price will drop to $50."

U.S., China factors

Economist David H. Wang said a considerable portion of the oil bull's thesis rests on increasing oil demand in emerging markets, particularly in China, and continued strong gasoline demand in the United States. China's demand is expected to remain solid, Wang said. Gasoline consumption increases in the U.S. may slow - - perhaps even decline slightly in 2008 - - if projections of a U.S. recession prove to be correct.

"Now, if China's oil use slows down simultaneously, then we will have a price break, and large oil price declines are possible," Wang said. However, Wang added that he is not in the "cyclical theorist" camp and sees oil's price moderating only slightly in 2008, to about $85 per barrel by year's end.

Further, both Wang and Dietz took pains to highlight the limitations of longitudinal projections / modeling scenarios stretching out more than three years. The most rigorous statistical analyses contain 10, 15 and sometimes more than 20 variables - - a significant change to just one of which can produce major changes in output - - in the case of oil, changes to global oil supply or global oil demand.

"In other words, you could have a rigorous model, and if one variable does not conform to your estimate, your projections for Years 3, 4, and 5 could be wrong. Very wrong," Wang said. "For this reason, one has to view 3-year, 5-year oil price projections in the proper context. They are projections with a large margin for error."