Crude Prices: The Most Expensive Oil Ever?
By Adam Lass
In this article
Crude oil futures hit $73/barrel today.
International Energy Agency reports that demand across 26 industrialized countries will rise by an average 2.2 percent a year between 2007 and 2012.
Project slippage and geopolitical problems will reduce OPEC's spare capacity by 2 million bpd by 2009.
Crude Prices: The Most Expensive Oil Ever?
Remember those prognosticators who were assuring you back in June that oil had peaked at some $69/barrel? You remember, they were the same guys who were touting $30 oil a year or so ago.
“Our reserves are replete, even overflowing… OPEC always over-pumps… Demand will naturally back off.” Wait, wait, here's a golden oldie: “Once our troops take Baghdad, the Iraqis will flood the market with cheap oil!”
Crude oil futures hit $73/barrel today. Not because of a storm in the Gulf of Mexico. Not because of a strike in Nigeria. Not because of Venezuelan saber rattling.
Simply because Americans can't back off. They live where they live (they certainly can't move anytime soon, what with the current real estate market), and they must light, cool and commute to and from their once -- and future -- dream houses.
So is this “the high,” after which we can expect prices to settle back to a nice comfortable $60 or $65 a barrel? Heck, $73 may be the 2007 high, but we aren't even back to the all-time high just yet. That honor is still held by last July's $78.40.
But we are well on our way, folks. And just as it didn't take a crisis to get here, it may not take one to get there either.
As per those optimistic types at the International Energy Agency, demand not just here in the fuel-thirsty U.S., but rather across the 26 industrialized countries the IEA advises, will rise by an average 2.2% a year between 2007 and 2012. This represents a 10% upgrade from its previous report issued last February.
Seems that in this global game of chicken, nobody is blinking or steering off. “Despite four years of high oil prices, this report sees increasing market tightness beyond 2010.” Let me help you out with the math: right now we can barely keep up with demand of 86.1 million barrels per day. By 2012 it will be up to 95.8 million barrels per day.
Think OPEC will bail us out? Combine “project slippage and geopolitical problems” and you can actually reduce OPEC's spare capacity by 2 million bpd by 2009. How about Mexico, or the North Sea or Kazahkstan? Alaska? Surely at these prices, someone will gin up some additional supply? The IEA says that non-OPEC conventional crude production appears to have reached an effective plateau as falling output at ageing fields and setbacks such as 2005's hurricanes in the Gulf of Mexico have slowed growth.
And before you start coming back at me about ethanol, soy oil et al, the same bean counters are calling global production of biofuels to hit 1.75 million barrels per day by 2012. And while that does represent a doubling of 2006 levels, it is nowhere near enough to even bother adding to the calculation.
What does this mean in real life? Try this: $4 gasoline is no longer a sick fantasy. Rather, it is inevitability. May be even $5 gas. Beyond that, yeah we are still talking fantasies.
For now.
From an investing standpoint, overlapping oil company options remains the single most-successful strategy Bryan and I have cooked up this year.
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Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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