Oil At $80 Raises Issue Of Oil At $100 In 2010

It is simple to dismiss the current rise in oil to just shy of $80 as a reaction to the value of the US dollar or a possible cold winter in the northern half of America. A more macroeconomic view might point to the theory that the world reached its “peak oil” production this year and that demand will out strip supply from now until the end of time.

It is also possible that the economic recovery is strong enough that the demand for crude is rising rapidly while OPEC and other producers intelligently keep output flat. They do not need to appear greedy. The cartel could cut supplies, but that would cause a reaction to OPEC’s actions as the potential cause of another recession. OPEC can wait and let demand drive higher prices while it remains neutral.

China says that its economy could expand by 12% next year. India puts its forecast at 8%. The crude needs of these two countries alone could significantly raise prices. But, the US GDP is also expected to improve in 2010, perhaps by as much as 4%. There are also predictions that many of the major nations in the EU will have economic growth next year.

The discussion about oil prices rarely focuses on the modest arithmetic of supply and demand. The size of global oil production will probably improve in the next decade. But, much of that improvement will not add to the supply available next year or the year after that. Newly discovered crude reserves sit below the Arctic Circle or in deep water off Brazil and Africa.

Crude prices probably will race toward $100 in the first half of 2010. The global economy needs more oil as the expansion moves into high gear.

Douglas A. McIntyre