$115 oil price peak predicts demographic forecaster

Demographics are the fundamental forces that drive demand around the world. The age of a consumer tracks a supply and demand cycle that is largely immune to the vagaries of interest rates and government policies; and the number of them at any point in this cycle is the crucial determinant of demand.

For example, in the US people on average take out their biggest mortgage at the age of 42, and the number of people who exist in this age group at any time is the most important determinant of demand for housing, not interest rates. It seems people borrow when they need to and scale back borrowings as they get older.

This is the theoretical justification for Harry S. Dent's analysis of global trends. He first became famous for forecasting the fall of Japan in the 1990s - based on the disappearance of the high spending consumer in that country.

Ageing consumers

He now sees a very similar trend emerging in the US and Europe from around 2010. The population profiles of both regions are ageing, and that should result in a serious slowdown in demand. Indeed, Mr. Dent says the impact will be so big and so unavoidable that stocks will crash and house prices decline by 60 per cent, just like in Japan in the 90s.

There are big implications for the oil market too. The US and Europe are the world's biggest consumers of oil. Mr. Dent's analysis of population trends suggest that the upward cycle of oil prices will continue until 2010 and then fall off sharply. He says oil could peak at around $115 and then crash back towards its previous lows of under $10.

Interestingly Mr. Dent forecasts that the Dow Jones will top out at around twice its current level at that time, and that house prices will plateau from here until then.

Investment implications

And while it is hard to argue with his fundamental analysis of population trends, there is surely more ground for debate about the investment implications. For investment markets usually anticipate, and discount events ahead of their actually happening - so at what point would markets discount demographic factors? Are they already there?

This is where science becomes more of an art. Investment markets tend to track the human emotional cycle as much as solid data. The famous stock analyst Benjamin Graham used to refer to Mr. Market and his 'good' and 'bad' days as investment cycles usually follow the pattern of a manic depressive with swings of mood.

Harry S. Dent asked his audience in Dubai whether there was a real estate bubble in Dubai, and to put up their hands if they agreed. Only a few did so, while to Mr. Dent the evidence in front of anyone's eyes seemed obvious.