Oil at $300 and Dow 37K By 2020?

This week's Barron's interview was with long-time energy analyst Charles T. Maxwell of Weeden and Co.  Mr.  Maxwell argued that whatever happened in Egypt, the price of oil is going to $300 per barrel by 2020.  At first glance this kind of statement seems ludicrous, especially when you consider the fact that the price of oil closed out 2010 at a level of just under $92.  However, if you break down the price target into annualized returns, it sounds a lot less outlandish. 

We calculated what type of returns would be required in order to propel oil from $92 to $300 per barrel between now and 2020.  In order to get there, oil would need to see annualized returns of 12.5%.  While 12.5% returns are hardly run of the mill, it sounds a lot more reasonable than saying it will get to $300 per barrel by 2020.  In the table below, we also show where the price of gold and the DJIA would be trading at in 2010 if they too saw annualized returns of 12.5%.  This is by no means a prediction of what's in store for these assets, but instead an illustration of the effects of compounding on price levels.  Gold over $4,500 and Dow 37K anyone?  It makes that Dow 36,000 forecast almost seem conservative!  Along the same lines, if you were to compound the price of a $2.50 slice of pizza by that same rate, by the time 2020 arrives you'll be paying over $8 bucks a slice!

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