Cheap oil: Dangerous for long-term

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Oil hovers below $79 after 3-day slideOil spikes to USD 81.26 a barrelOil eases to USD 78.65 a barrelOil tops $80, highest since Oct 14, 2008

London: Bank.

"In a downturn, you need any type of stimulus you can get and a lower oil price can help," he said. "But you need to find a stable 'sweet spot' which balances the need for exploration and the funding of alternative energy projects."

Stability in energy prices is essential for any sort of long-term planning, Lewis said, reinforcing comments by India's oil secretary, R.S. Pandey.

"As a major consuming nation we would like prices to remain stable and around this level," Pandey said on Tuesday. "What is more important is there has to be stability in prices. Volatility of the kind witnessed this year has been very bad."

"SWEET SPOT"

While the desired "sweet spot" for oil prices may be lower during a recession, when extra stimulus is needed, most oil industry economists say it is probably well above where oil prices are at the moment -- around $47 a barrel.

In real terms over the last 40 years at today's prices, Deutsche Bank estimates that oil prices have averaged around $35 a barrel, a price it says is far too low for long-term comfort.

"The 'sweet spot' is between $60 and $80, probably the top of that range. That is the long-term fair value," Lewis said.

Simon Wardell, director of the energy markets group at Global Insight Ltd in London, sees broad agreement between OPEC and consuming countries that around $75 is about right for oil.

"That price gets you investment in new production, is high enough to encourage more efficient use of oil and is enough to maintain the budgets of the Middle Eastern countries," he said.

Washington-based consultancy PFC Energy estimates most Middle Eastern oil producers need oil prices this year between $40 and $60 to balance their external accounts.

"My concern is the price going too low," said Wardell. "Closer to $70-75 is a decent equilibrium price."

The International Energy Agency (IEA), which advises 28 industrialized countries on energy policy, says it wants oil prices high enough to foster sustained investment in new energy sources, including costly deep-sea drilling.

"It is very difficult to put an absolute level on what price is fair," said David Fyfe, head of the IEA's oil industry and markets division. "But there is a lot of high cost oil, be it in ultra deep-water, or Canadian oil sands or Arctic developments in northern Russia, which needs a relatively high price."