The national average cost of gasoline hit $3.13 per gallon on Friday, continuing an upward climb above record highs for this time of year. And though the price of crude has slipped somewhat from its January peak above $92 per barrel, the IEA this week released a new energy forecast that predicting oil to average $93 per barrel for 2011—a $14 increase over last year.
Crude’s resurgence has been attributed to a variety of causes and there is disagreement about the primary catalyst driving the price forward. Fears over a disruption of tankers moving through the Suez Canal have subsided—a factor that seems to be behind oil’s recent downward adjustment—and there is little question about the ability of producers to meet demand in short-run. But the market has also been forced to price-in several long-term considerations that have put an upward pressure on oil futures.
Wikileaks Sheds New Light on Legitimacy of Peak Oil Fears
This week, Wikileaks revealed that in 2007, a Saudi oil executive privately warned a U.S. diplomat that his country’s oil reserves are significantly lower than claimed. Sadad al-Husseini, the former head of exploration for the state-run oil monopoly, Aramco, is said to have told the diplomat that “Aramco’s reserves are overstated by as much as 300bn barrels.” The official went on to predict that “once 50% of original proven reserves [have] been reached…a steady output in decline will ensue and no amount of effort will be able to stop it.”
The news itself had little impact on oil prices—supposedly, the cables in question were widely known about on Wall Street years before their Wikileaks release—and many analysts have long downgraded Saudi estimates of the amount of recoverable reserves remaining in that country.
Indeed, the sentiment underpinning investors’ bullish oil outlook stems more from the collective potential for supply-demand strife down the road (like “peak oil” in places like Saudi Arabia,) than from any specific news event of the past few months.
Economic Growing Pains Could Punish at the Pump
Another driver for oil prices has been the increasingly popular view that the United States is headed for an inflationary period. Years of deficit spending—coupled with the predicted long-term effects of Federal Reserve policies intended to stimulate the financial system—have led to concerns that the American money supply has grown faster than the economy itself. As the world’s top oil consumer, the U.S. has the power to drastically alter the world market for oil with a weakening dollar.
Many experts believe that the true threat to oil price stability comes not from the potential for a disruption of supply, but from the impending growth of demand in developing economies.
“There are 700 cars for every 1,000 Americans right now,” said Brad Schaeffer of INFA Energy Brokers to CNBC.com recently. “Currently, there are 30 cars for every 1,000 Chinese: And that number is expected to go up to 240 by the year 2035. That implies an enormous strain on existing crude oil supplies.
Reading the tea leaves only gets you so far, but the cumulative message to take from recent world events and the corresponding performance of energy markets, is that investors are betting on a sustained increase in the price of oil in the near future. And unlike the 2008 oil spike, this time around, there may be no looking back.