What The Shale Guru Told Me About Oil Prices

In 2009, I went to Houston to see one of the great minds of the oil world.

The personality is Stephen Holditch. Widely acknowledged as the godfather of shale gas engineering.

Stephen did a lot of the early reserves engineering for the Barnett plays. He played a pivotal role in unlocking U.S. shales. As a professor today at Texas A&M he's still talked about in hallowed tones around Texas.

At the time, crude was creeping back from its $30, post-2008 low. So I offhandedly asked him the question many investors were wondering: where was the oil price going?

Without blinking, he said, "At least $75."

Such an exact figure was unexpected. But he explained that it was quite a simple calculation. Pointing to charts on his walls he noted, "That's the price OPEC needs to balance its budgets."

And indeed, WTI traded around that exact level for much of the next 18 months. Before finally heading higher in early 2011.

The guru's words came back to me this week. When the International Monetary Fund released a report showing that Middle East governments have been on a development-driven spending spree.

To the point where the IMF now estimates $90 crude is needed for most OPEC members to balance their budgets.

A potentially important point of note, some people would say.

Here's to those in the know,

By. Dave Forest