Oil prices recently surged to over $ 120 a barrel. It’s amazing to watch these prices climb and climb. What we’re seeing here is a fundamental shift in the way oil is bought and sold around the globe. Make no mistake about it, high oil prices are here to stay – and they’ll go higher.
I’m not the only one who thinks so.
Yesterday, Goldman Sachs announced they expected oil to reach somewhere between $ 150 and $ 200 per barrel. They called it a “super-spike.” And they thought it would happen in the next year or two. Personally, I think they’re wrong. I think an estimate of $ 200 oil is too low. But more on that in a minute.
Right now Oil is trading above $ 120 and the average cost of a gallon of gasoline is over $ 3.61. This is down a penny from the all time highs that gas reached last week.
Can it go higher?
Of course gas prices can go higher. According to our own Energy Department gas prices are expected to increase to $ 3.73 next month. I spoke with my brother living in Hawaii and he said prices are over $ 4.00 a gallon already.
So, why do prices keep going up?
Ask most people watching the markets and they’ll toss out a few ideas. Supply disruptions in Nigeria. Saber rattling by the idiot running Iran. The fall of the US Dollar which makes oil cheaper for the rest of the world.
All of these are true. But everyone glosses over the biggest reason for high oil. Supply and demand. It’s simple economics and it always will be. Supply can’t keep up with demand. In that situation prices have to go up. I don’t care if you are selling rice, corn, oil or beanie babies. If demand exceeds supply prices go up.
Where’s the supply?
With high oil prices you’d think major oil producers would be rushing as much of the stuff to the market as they can. They are. The problem is that oil production is not something that starts and stops on a dime.
Toss out all of the other reasons for declining oil supply. Old oil wells. Falling production in Mexico and Russia. Supply disruptions in Nigeria. Problems in Iraq. Potential conflict with Iran. The heart of the matter is this. It’s hard to find oil . . . and even harder to get it out of the ground.
According to the American Petroleum Institute (API) more than 4,500 oil wells were completed in the first quarter of 2008 (and that’s just in the US). That’s a record folks. It’s up 12 percent from last year and is the highest activity recorded in more than 20 years. Yet the supply of oil on the market is only up slightly.
While everyone around the world is working hard to bring oil to the market demand continues to outpace supply. Where’s this demand coming from? No big surprise . . . its China. I know I’ve said it before, but I’ll say it again. Demand for commodities and natural resources in China won’t be declining anytime soon.
Now, it would take weeks to fully explain the complex demand characteristics for oil in China. But let me give you a simple example of why demand will continue to rise.
A little perspective first. In the US we have about 77 cars for every hundred people. In China they have 3. That’s right, 3 cars for every 100 people. The world average is 12. The Chinese like cars, and they want more cars. In 2007, 8 million new cars were sold in China. In 2008 it’s going to be more than 10 million.
And that impacts oil demand how?
Official numbers were hard to come by but here’s my estimate. According to China’s National Bureau of Statistics they had 24 million private cars in 2003. China also imported 1.4 million barrels of oil per day according to China Daily News. In 2007 the number of cars had more than doubled to 54 million. Today oil imports are 7.9 million barrels of oil a day.
That’s an increase of more than 460% for those of you doing the math.
Now, not all of the oil imported goes to power cars . . . but you get the idea. In five years the number of private cars in China could double again. As the roads and bridges and other infrastructure improve I see people driving more – not less. That means more demand for gasoline . . . and oil.
Demand for oil’s not going to fall any time soon (it might slow as prices increase but it’s not going to stop). That’s why I think oil’s headed higher than $ 200 a barrel in the next few years. And that’s when we’ll see gas prices in the U.S. over $ 8 a gallon.
Brian Mikes is the editor of the Dynamic Wealth Report, a free investment newsletter that offers investment ideas and news you can’t get from the mainstream investment press. Brian and his team bring decades of Wall Street and Silicon Valley experience to help you discover profitable trading ideas you can use today.