The real reasons for high oil prices

At Stratfor we have not commented on the high price of oil in some time, mostly because there has been little to say. While we believe that the peak oil theory – the idea that there is a only a finite amount of crude, so eventually production will peak and then fall – is correct, we do not believe such a peak will occur any time soon. Less than one-quarter of the world’s surface has been explored for petroleum to date, and advances in deepwater drilling and exploiting non-conventional crudes, such as oil sands, in just the past decade have been mind-numbing. True, the costs of extracting that crude – and the large capital costs behind cutting edge technologies – may well go up, but even here familiarity and economies of scale argue for the opposite.
All in all, this suggests that not only is the January 2 price point about to become viewed as aberrantly high, but that we could soon experience price drops that have not been seen since the days immediately after the September 11 attacks. (Most people forget that the September 11 attacks made people fear that a global recession was imminent – that fear pushed oil prices down, not up.)

A price rationalisation does not equal a price plunge. Stratfor sees no reason for a massive reduction in global demand, simply that geopolitical risks in major oil producers are unwinding, not intensifying. And here too there is an exception. The Russians have every reason to push hard to re-establish supremacy in their near region. Never forget that despite Russia’s problems and weaknesses, they are also the world’s second largest oil producer. If push came to shove, even though they know it could well hurt them as badly as anyone, the Russians have the ability to cause a world of hurt.

Business Spectator