With oil down to about $120 a barrel it is easy to forget that the dynamics of supply and demand still favor higher prices. That may not be true today, but it will not take many years for supply to begin to dwindle. Exports from countries like Indonesia and Mexico are already running down. Political unrest could still cause long-term supply interruptions from some nations, particularly Nigeria and Iran.
Oil exporters want to keep more of their own crude to fuel a rising number of cars and burgeoning infrastructures. Spiking oil prices are not a sure thing, but the situation is getting closer to that.
A new study from The Chatham House reports that a supply crunch appears likely around 2013, "even allowing for some increase in capacity over the next few years," Their estimate is that crude could make it all the way to $200.
Why? Among other things oil is getting harder to find and extract. Oil companies have their own greedy reasons to put shareholder returns ahead of saving the world by losing money on trying to find and recover crude in remote places.
The alternative argument says that, even if oil supplies drop, demand across the whole world will fall. China and India will need less because they will face difficult economic times. All US citizens will drive around in cars fueled by electricity or water. T. Boone Pickens will build his windmill farms. All will be right with the world.
These are the best laid plans. But, converting the US to alternative energies is a multi-decade project. Expansion in places like China may slow, but recessions do not go on forever.
The dynamics of the market will drive oil up.
Douglas A. McIntyre
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