Trend: Oil prices will hit $180 a barrel and gasoline will cost $5.50 a gallon within two years due to the geology and geopolitics of oil producers.
Jim Jubak at MSN Money explains why problems in the global oil supply could take the price of a barrel of crude to $180. Excerpts below.
Link: Why oil could hit $180 a barrel - MSN Money.
...today's $3.50-a-gallon gasoline would look cheap if oil prices hit $180 a barrel. At that price for a barrel of oil, gasoline would cost somewhere north of $5.50 a gallon.
The good news is that's about the price, experts now say, that would send global consumption tumbling and oil prices into retreat, as drivers scrambled to find ways to conserve.
Of course, experts once thought $3-a-gallon gasoline would lead to a drop in consumption. The latest forecast from the International Energy Agency calls for global oil demand of 87.2 million barrels a day this year. That would be an increase in consumption of 1.3 million barrels a day from 2007 -- despite a U.S. economic slowdown and soaring oil prices.
So why do I think oil prices will keep climbing for two more years at least?
A terrible coincidence of geology and geopolitics. Just when oil is getting more expensive to produce, the oil industries in three key countries -- Mexico, Russia and Nigeria -- find themselves short of cash. And without that cash, oil production in these countries, and global oil production in general, is headed into a decline.
The International Energy Agency now estimates that worldwide production from older existing fields is now falling each year by about 4.5 million barrels a day. To stay even -- let alone to meet rising demand from the new automobile drivers of Moscow, Shanghai and Tehran -- the world has to increase annual production by 4.5 million barrels a day.
You'd think that would be easy when oil is selling for more than $115 a barrel. But it's not.
What's the problem? Geology and money. But mostly money.
It's that gap between production declines that are continuing and visible now and production increases that are speculative and in the future that will keep upward pressure on oil prices.
In the short term, the oil market is right not to underestimate the ability of the governments of national oil producers to shoot themselves in the foot by starving their national industries of capital. We're likely to see a continuation of these self-defeating strategies among enough big oil-producing countries to keep oil prices climbing until global consumers finally say, "We can't take higher prices anymore." In that crisis, falling demand will break the upward trend in oil prices.
The only thing that ultimately breaks that trend is the production of alternative-transportation fuels in mass-market volumes.
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