Oil and Gas Prices
Don't Panic when Oil Breaks $120 a barrel in 2008
After filling up my tank early this morning, I couldn't help thinking it was July. And to be honest, if the weather wasn't hovering around 30o F, I probably would have checked a calendar.
If you haven't noticed, prices at the pump have been rising so far in 2008. According to the Energy Information Administration's (EIA) weekly petroleum report, the average price for gasoline last week was $3.13 a gallon.
Although I was paying slightly more than the average price, the fact that we're paying over $3 a gallon during the winter doesn't paint a good picture for the summer of 2008, especially considering pump prices have increased over 31% compared to last year.
Now, I'm just talking about prices in the U.S. I've heard a lot of horror stories coming from my readers across the Atlantic.
So my question to you is, "What's your breaking point?"
The fivefold increase in oil prices over the several years hasn't been able to lower demand. Lately I've had several people preaching to me that oil would significantly fall in 2008. The first thing they would do is point at the growth in U.S. oil inventories over the last month and a half. Sure, U.S. stocks of crude oil have grown for the last six weeks.
But it's time to face some harsh facts:
We're importing more oil due to a decline in U.S. oil production.
U.S. crude oil inventories are over 21 million barrels less than a year ago.
Oil Prices have consistently failed to fall below $90 a barrel recently.
I'll confess I may have been too quick to suggest that people are accepting $100 oil, but as a reader pointed out to me this week, "We have no choice."
And I don't see things improving.
Oil Prices Breaking $120 in 2008
Ever since the price for a barrel of oil pushed past the $100 benchmark, people have been asking me where it's going from here. I've read a wide range of predictions, all of them dodging the question in some way or another. Despite a few of them suggesting prices will "inevitably fall", most have estimated oil will average slightly higher than current prices.
Geopolitical and weather factors can exacerbate prices in a heartbeat, but the long term driver behind oil prices has always been supply and demand. Admittedly, focusing solely on supply and demand is only part of the picture, but one thing has become clear: oil markets are getting tighter.
For now, however, I won't even take geopolitical or weather related influences and assume we have another relatively calm hurricane season in 2008.
If oil prices remain above $90 a barrel over the next few months, then we may be seeing $120 for a barrel of oil during the summer. OPEC seems intent on defending $90 oil, especially if rumors of a production cut in their next meeting become a reality. We'll find out for sure next week.
Last year, oil prices briefly dipped to $50 a barrel before heading back up. Since then, they haven't looked back. During the peak of 2007's driving season, prices reached around $76 a barrel.
A similar increase in 2008 will mean $140 for a barrel of oil by July!
Even with lower demand estimates, I still don't see enough of a production boost from countries to make a dent in prices. After all, the only OPEC producer that are capable of increasing output over the next few years is Saudi Arabia, any growth beyond that is questionable. Production from newer fields will take years to come online.
One of the problems is that the world's oil production is too dependent on a small number of giant fields, most of which have been pumping oil for over four decades. It's not enough that production remains flat since producers are forced to make up for decline rates. Unconventional production from offshore drilling, heavy oil deposits or even oil shales will be able to help, but won't be enough in the long run.
Remember, it wasn't too long ago that $100 oil was unimaginable.
Let's hope our government will think of a better way to deal with soaring energy prices other than trying to sue OPEC.
Gasoline Hike in 2008
Look, you don't need me to tell you the kind of effect that $120 oil would have on pump prices. If you toss in all of those other factors that can swing oil prices, we're going to be in for another record year.
Now, you don't need me to tell you the kind of pain our wallets will have at the pump if oil hits $120 a barrel this summer. I expect EIA will be revising their price forecasts throughout the year as oil prices continues to rise.
When I'm paying between $4-5 per gallon this summer,perhaps next year we'll be remember fondly what it was like paying under $3 for a gallon of gas.
Until next time,
Energy Demand will Increase 58% Over the Next 25 Years
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